Private equity: second-hand business Premium

The secondary buyout market is coming of age

Taboo no more. For two decades buyout firms trying to sell entire funds (rather than single investments) to a rival would have tiptoed around looking for a buyer. Selling funds was not the done thing. But the “second-hand” private equity market is coming of age: billions of dollars are flowing into the once quiet sector.

Setter Capital, a secondary market adviser, estimates that these deals will rise by a quarter this year, to a record $45bn. JPMorgan’s sale of half its private equity unit to Lexington Partners and AlpInvest (part of Carlyle) for $2bn is the latest. Earlier this month Lexington bought an 80 per cent stake in Citigroup’s $1.5bn Metal Capital II fund. Blackstone acquired Credit Suisse’s fund last year. It now oversees a $16bn secondary portfolio and will raise $4.4bn to buy more secondaries.

On the banks’ side, the activity is mostly driven by regulatory pressures. The Volcker rule will force many to sell big chunks of their private equity business as they can only hold up to 3 per cent of their capital in buyout and hedge funds. Being involved at all is not worth the regulatory costs and hassles for many banks.

The buyout firms have over $40bn of unused cash waiting to be deployed and their clients – pension and sovereign wealth funds – want to diversify their portfolios. So the secondary market is a useful option. Since the 1990s, the number of potential buyers has grown from a handful to thousands, injecting the necessary liquidity to attract big names to the game. The Abu Dhabi Investment Authority, for example, is reportedly in talks with Axa’s buyout spin-off Ardian about investing $2bn in a secondary fund.

The funds of big name investors have recently commanded significant premiums to net asset value, according to Setter. Given that, there is no reason to be shy about selling.

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