Sophisticated LPs utilizing the Secondary Market
2015 marks yet another year of increased sophistication among LPs in private equity. Recent years’ trend of increased use of the secondary market as a tool for active portfolio management, was evident in Cubera’s deal flow during the year.
As LPs in private equity funds are becoming more sophisticated, their use of the secondary market for portfolio management is continuing to increase. According to Evercore (an independent investment banking advisory firm and specialist secondary advisor), active portfolio management was the main driver of sales in the secondary market during 2015 and accounted for 66% of total sales, up from 50% during 2014 and 27% in 2013. Evercore had distressed sellers down for 1% of the market in 2015, meaning there basically were no distressed sellers.
The increase in sophistication among LPs resulted in yet another strong year for Cubera, both in terms of deal flow and investments made. Cubera has had numerous dialogues with potential sellers and invested in line with our expectations for the year. Looking back it is evident that portfolio management was the main driver of sales in our market during 2015. We noted, among others, the following rationales when discussing with potential sellers:
Manage number of relationships – opportunistically sell funds after deciding not to re-up with a GP
Execute changes in target allocations (or fine-tune allocation) – use the secondary market to decrease exposure to the asset class or to a certain geography. To mention one concrete example, we saw investors with a relatively low exposure to Private Equity wanting to sell in order to fully focus on their core strategies
Locking in a profit or a certain return – sell to avoid having to hold until liquidation, which could be many years after most of the value creation has come. For an LP the needle might not move after a certain time, but for a secondary investor much value could still be found as they would have a much lower invested amount (due to previous realizations in the fund). We did come across very sophisticated LPs with a written policy of selling funds after a particular year in the funds lifetime. - Yes, even with the GPs they re-up with
All of the above are sound reasons to sell and using the secondary market makes perfect sense for the individual investor. The stigma of selling an LP position is gone and Cubera expects the development seen so far to continue. For most investors Private Equity is one asset class among others and buying and selling on a secondary market is business as usual in all other assets classes. If the yearly turnover in shares would be the same in listed equities as in private equity perhaps the trading in the world’s stock market’s would be done for the year by now?
LPs in private equity are constantly evolving and as a specialist buyer of LP positions Cubera is looking forward to seeing new sellers come to the market and continued dialogues with those who have taken the active decision to explore secondary sales.