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25th July 2011

Investors look to conjure up liquidity

In stark contrast to the traditional private equity market, the buying and selling of investors’ interests in private equity funds – crudely termed the secondaries market – has grown rapidly over the past 24 months.

Swiss bank UBS, one of the biggest intermediaries in this opaque market, estimates $22bn of deals were signed last year as the market more than doubled the $9bn of transactions of 2009 and trumped the $20bn previous record from 2008.

Reliable data on dealflow is hard to establish, but based on the small number of large-scale deals that have been announced so far this year – including Axa Private Equity’s $1.7bn purchase of Citigroup’s private equity assets in June – the market appears set to increase in size again this year.

Nicolas Lanel, managing director at UBS’ private funds group, said: “The frenzy of deals continues and we expect transaction volume globally to surpass the $25bn mark.”

However, there are signs that secondaries may be falling out of favour with investors. There are currently 31 secondaries funds on the road in Europe, targeting an aggregate $24.8bn according to data provider Preqin, however just six secondaries funds worth an aggregate $900m have reached close during 2011. In contrast, more than $2bn was raised during the same period in both 2009 and 2010.

One Europe-based secondaries fund manager said: “The market out there is certainly getting tighter and more competitive. Investors don’t have to sell for a song anymore and are increasingly aware it may affect the relationship with the fund manager.”


This has led to investors searching for other ways to gain an early upside on their commitments. As a result, there has been renewed interest in securitisations of fund interests.

In this scenario, a selection of the investors’ interests are moved into a special purpose vehicle, repackaged into a range of debt and equity tranches, and sold as bonds in the capital markets.

The investor will then essentially be a manager of those interests but will typically buy some of the equity tranche to ensure alignment of interests and share in any future gains.

According to Thomas Liaudet, a partner at placement agent Campbell Lutyens, said that on paper, securitisations were a “fantastic idea” and investors were increasingly exploring their feasibility. However, he added they involve significant challenges that at the moment made them unattractive to most clients.

Liaudet said: “To be done effectively, a securitisation requires a diversified and high-quality portfolio of assets, which need to be substantially drawn [committed to an underlying company]. Being significantly undrawn will affect the amount of leverage that can be committed [leverage is calculated by net asset value] and will create uncertainty over cash flow projections.

“These criteria are needed to ensure that the ratings agencies provide the bonds with an acceptable rating, typically AA+ as a minimum. This brings the opportunity to market to a wider pool of investors and lower the amount of interest being paid by the seller.

“They can bring a number of benefits to the seller, most obviously they provide a cash windfall. Also in a poor market they allow the seller to argue for a longer term view on NAV and price the assets at less of a discount than would be the case in a straight sale.”

Liaudet added that in contrast to a straight sale of interests, investors are able to retain a relationship with their managers, something which industry experts say should not be underestimated.

Despite the benefits, the last successful securitisation of a private equity portfolio was completed by the Singapore sovereign wealth fund Temasek in 2006. The situation is blamed in part on the turbulence in the capital markets and in part because the level of due diligence is higher than in a straight sale, according to industry participants.

One leading fund of funds manager said that in most cases this diligence extends to asking private equity firms to provide information on their assets.

This provides a potential conflict of interest, given that the buyers may also be competitors for assets. There is also the risk that should the interests not perform, the bond will be downgraded, making payments more expensive.

The manager added: some institutions are not allowed to hold bonds below a certain rating, increasing risk.


In an effort to get around these problems and still provide the investor with capital without the need for an outright sale, so-called quasi-securitisations are now beginning to take place.

One such practitioner is 17Capital, a London-based firm founded by Pierre-Antoine de Selancy, a former partner at fund of funds group AGF Private Equity. The firm provides what it describes as “mezzanine” financing to investors looking to release cash from commitments early.

Selancy said: “We look at secondary transactions slightly differently from the rest of the market. We will provide LPs [investors] with upfront cash secured against their drawn commitments and recoup the money at realisation plus an agreed interest fee and a small share of the profit. This lets the LP keep the upside from the commitment while realising cash early without selling.”

17Capital – which closed its debut fund last year – works with players across the market, including Paris-based listed vehicle Altamir Amboise.

Whether such packages take root could greatly depend on the wider economic environment. If things improve and private equity firms begin to perform better, industry executives expect there to be more appetite for securitisations. If conditions worsen, they believe investors will favour more traditional secondaries options and seek to trade their fund interests.

Magic wands

  • Diamond III: This was the third securitisation vehicle completed by fund of funds SVG Capital. Launched in 2007, the €600m vehicle consisted of revolving debt credit facility of €320m and equity of €280m. As of September 2010, the vehicle was predominately invested in the consumer and healthcare sectors in Europe and the US.
  • Astrea: In summer 2006, Singaporean Sovereign Wealth Fund Temasek securitised 46 limited partner interests into a newly created special purpose vehicle, Astrea. This was designed to attract debt and equity purchasers and spanned a variety of geographies and fund sizes. The sale raised $810m for Temasek.
  • Pine Street: In late 2002, American insurance group AIG securitised a diversified portfolio of limited partnership interests in 64 private equity funds. The portfolio offered investors the private equity funds with a total exposure of $1bn.