Mumbai: Secondary transactions or secondaries, a much-talked about liquidity creating tool for investors in private equity (PE) funds in the wake of the global credit squeeze, have become difficult to close because of wide gaps in pricing expectations, according to Pinal Nicum, principal at London-headquartered Coller Capital, a top player in the international secondaries market.
In secondary transactions, investors in PE funds, known as limited partners, or LPs, sell their commitments or positions in the funds to another LP, mainly for creating liquidity.
There has been renewed vigour for these deals ever since the global credit crisis began nine months ago and many LPs found themselves not in a position to meet their capital commitments to funds.
Mismatch: Pinal Nicum, principal at Coller, says there is a dislocation in expectations and pricing.
LPs looking to buy out others’ positions were excited about the opportunities as the deals were expected to come at steep discounts. But as Nicum said, these deals have been hard to close.
“Broadly, across the secondaries market, there are not a lot of transactions that are actually closing. One of the reasons is that there is a dislocation at the moment in terms of sellers’ expectations and buyers’ pricing,” Nicum said over the phone from London. “We (buyers) all look at the future to try and evaluate how much something is worth today. Sellers, naturally, look at today or yesterday to evaluate the prices that are being given.”
Coller Capital is a key fund in the global secondaries market with about $8 billion (Rs37,920 crore) currently under management, according to its website. The fund says that in 2007 it closed the world’s largest secondaries fund, Coller International Partners V, with capital commitments of $4.8 billion from 200 institutional investors.
In India, the secondaries market is still nascent.
LGT Capital Partners (Asia-Pacific) Ltd, a Switzerland-based “fund of funds” that manages at least $18 billion in hedge fund and PE assets, CDC Group Plc., the UK government-owned fund of funds investing in emerging market fund managers, and New York-based Siguler Guff and Co. Llc. have in the past said they have seen such secondary positions available among Indian fund managers and India-dedicated funds.
But neither these LPs nor Coller was able to put a number to the funds in India that have such positions.
Coller has not made any secondary purchases in India in the current downturn. It had previously invested in five different funds managed by ICICI Venture Funds Management Co. Ltd, IL&FS Investment Managers Ltd and UTI Ventures Funds Management Co. Pvt. Ltd.
Nicum said these investments date back a while now and had nothing to do with LP defaults or manager issues. “It was the opposite. All those investors (from whom Coller bought) were looking to book profits.”
With the downturn, though, Coller is seeing a number of opportunities to buy fresh secondary positions. “It’s not restricted to India. We’re seeing opportunities to buy further positions across the world,” said Nicum.
Interestingly, Coller’s latest Global Private Equity Barometer, a six-monthly survey of LPs, shows that only a 10th of LPs are likely to default on PE commitments over the next two years. “That’s not a huge proportion really,” said Nicum.
The survey for summer 2009, releasing on 15 June, has responses from 120 investors, including pension funds, sovereign wealth funds, insurance companies, endowments and family offices.
Despite the estimated low defaults as a percentage of the overall PE pie, absolute numbers in terms of the secondary positions that will become available look enormous.
“In 2009 and 2010, depending on who you’re listening to among the many commentators in the market making predictions on how big the secondaries market is going to be, the numbers go from anywhere between $30 billion of commitments available, all the way up to $150 billion over the next three-four years,” said Nicum.