Study shows secondaries pricing falls 28%

As private equity firms wrestle with their year-end valuations, spreads in the secondaries market indicate that portfolios have lost substantial value. Average high bids as a percentage of net asset value in the private equity secondaries market have fallen 28 percent from the end of June through November, according to analysis from secondaries advisor Cogent Partners.

Cogent's study analyses the bids that it received on a diverse group of approximately 300 private equity partnerships marketed from July 2008 through November 2008. Approximately 56 percent were buyout funds, 38 percent were venture funds and 6 percent were other fund types. The bids represent first-round bids.

At the end of November, average high bids stood at 61 percent of NAV, average median bids stood at 55.2 percent and average low bids stood at 50.1 percent. The average high bid for the first half of 2008 was 84.7 percent of NAV.

“The key factor driving the changes in pricing has been the fact that valuations haven't been reset by and large in the private equity portfolios,” Cogent managing director Colin McGrady told sister news service PrivateEquityOnline. “Given that the outlook for the underlying private equity investments has deteriorated along with the overall economy, that change in pricing has had to be reflected in the secondaries market because the general partners aren't reflecting it in the valuations they're holding the companies at.”

Although pricing for all fund types fell, buyout funds fetched substantially greater average high bids of 64.7 percent while average high bids for venture funds stood at 55 percent, driven down by the pricing for older vintages.

“Historically in the secondary market, more mature assets have received better pricing. Conversely, the most mature assets on the venture side are actually the most problematic to get strong pricing for,” said McGrady, adding that the average pricing for venture funds is being driven down by these assets.

The venture funds with vintages circa 2002 and 2003 had planned to be in “harvest mode” during the upcoming 12-month period, McGrady said. The poor exit outlook means that additional capital will be needed to protect positions from funds that may have no capital remaining for follow-on investments.

On the buyout side, McGrady said that mega-buyout funds also are receiving poor pricing as the natural buyers of the interests “got their fill” of these funds 18 months ago and the assets are in the market in great quantities. Therefore, strong discounts are needed to entice buyers into additional exposure.

Secondaries adviser Campbell Lutyens estimates in excess of $35 billion has been recently raised or about to be raised to buy secondary fund interests.