Private Equity ”Secondary” Deals Are Booming

When many pension plans and college endowments were hit with big losses during the financial crisis and found it tough to meet payout deadlines or fund school budgets, one solution seemed obvious: sell off some private equity interests to raise cash. Investment firms geared up for a deluge of deals.

Yet as bid-ask spreads widened, many CIOs held back. But now, belatedly, the secondary-deal spigot has opened full blast. “There have been 100 secondaries in 2010 alone, and more are rolling in every day,” report Sean Hill and Malcolm Nicholls III, attorneys at Proskauer Rose in New York. Deal flow is heading to between $20 billion and $25 billion this year, estimates William Murphy, a managing director at Cogent Partners in New York. In April Paris-based AXA Private Equity, a secondary fund of funds, bought $1.9 billion worth of private partnership interests from Bank of America, in one of the largest secondary deals on record.

What caused the market turn? Investors’ worst fears weren’t realized, says Joshua Lerner, finance and entrepreneurship professor at Harvard Business School. As markets recovered, private equity firms were able to write down valuations, reducing secondary-market discounts. “It’s a market in equilibrium now, which makes transaction activity possible,” explains Murphy. Access to secondary deals is not only about bargain-hunting. Investors can develop relationships with coveted private equity firms.