Private equity fund investors may want to sell their investments to raise cash, reduce their risk or re-balance their asset allocation. These positions are similar to hedge fund investments. They do not trade on a stock market daily and are hard to price.
At the 4th Annual Manager Search and Selection Conference at NYSSA in 2009, Nigel Dawn of UBS spoke about that year's state of affairs. At the time, he was head of the Secondary Market Advisory team. Historically, the spread between bid and ask prices was 8%. In 2009, the spread was 20%. Surprisingly enough, the growth was in private equity real estate funds.
The following year, David Tom, CFA, of the VCFA Group had a presentation about the secondary private equity market. He deals with three types of investments: limited partner interests in small and middle market buyout, venture capital, mezzanine and other private equity funds; secondary direct private investments; and portfolios of private assets. Secondary funds had $50 billion in assets under management with larger funds (anything over $500 million) holding 80% of the assets. The secondary market is steadily growing. In 2009, it was 4% of the total US private equity AUM and 3% of global AUM. This is up from 1.5% and 1% in 2000 and 0.2% and 0.2% in 1990. Historically, there has been a excess of secondary investment being sold on the market and not enough buyers. The gap is much larger during crises such as the credit crisis of 2008 and the dot com meltdown in 2001.
Again, thanks to NYSSA for holding two great events.
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