The Era of Limited Partner Cooperation

THE MOST POPULAR FUNDS IN THE SECONDARY MARKET

Secondaries Investors Focus on Mainstream Strategies

Using Palico’s wish lists, since the end of March last year investors have selected 1,136 different funds that they would like to purchase through the secondary market. In total, over 18 months Palico members have registered 2,234 wishes. Arguably, the biggest change between this period and the previous year-and a-half, is the kind of fund investors typically want to buy. When we did this exercise in the spring of 2015, the top-10 list was peppered with specialists, including two fairly targeted emerging markets vehicles (one focusing on Latin America and one on China), a U.S. distressed fund, an oil & gas fund and a small cap fund. The current list is mostly made up of mainstream generalist funds – either large buyout or midmarket vehicles.

Older Vintages Seen Offering Better Value

Through primary market fundraisings, investors are increasingly committing to niche strategies – almost by definition uncrowded areas where pricing looks attractive. But they are increasingly seeking exposure to private equity’s mainstream through older fund vintages that are characterized by lower acquisition multiples than the record highs holding sway today. More often than not, the stakes of older PE vehicles tend to be valued conservatively, plus the funds are often available at discounts to net asset value.

For LPs Focused on North America, Large Buyout Funds are Particularly Popular

‘Play-it-safe’ mega vehicles that hold stakes in large companies, mostly in the U.S., rank as the three most popular funds on secondary wish lists – the top-ranked vehicle is run by Blackstone with both the second and third ranked managed by Carlyle. Given public markets are considered fully valued by many, and U.S. interest rates look on course for a series of hikes, investors in U.S. private equity – despite their long-term focus – are relatively risk averse today.

Europe is Seen as a Place of Bargains in the Secondary Market

With interest rates likely to stay low in Europe for the foreseeable future, many view the region, characterized by slow growth and a historically cheap currency, as a bargain compared with the U.S. This may explain why a plurality of the 10 most wished for funds on Palico – 50 percent – are Europe focused. All of them also concentrate their investment in midmarket companies, typically firms with revenues of less than $500 million. Generally, the midmarket is regarded as riskier than large buyouts, but with higher potential returns.

Asia and Venture Round out the Top 10

The only emerging market fund on the top-10 list is 9th placed Affinity Asia Pacific III. At $2.8 billion, it’s a large emerging market vehicle with a particularly broad geographic focus – all of the Asia Pacific region. Ranked in 10th and final place is the only really niche-focused fund on the list, Access Venture Partners II. The $30 million vehicle focuses on venture capital investments in Colorado, a particularly small but highly regarded center for tech startups. Given the large number of investors who would like exposure to VC in Colorado, and the relative dearth of venture capitalists in the state, the popularity of Access in the secondary market is less surprising than it might seem.

Palico is Great for Secondaries and For Fundraising Connections

A new fundraising or secondary is posted daily, and over 1,000 LPs and GPs initiate contact on Palico every month. Moreover, using Palico’s newly launched Secondaries Match platform, LPs can vet, buy and sell secondaries with or without the aid of intermediaries, and with sellers guaranteed full anonymity prior to transactions.