Secondary Markets of Private Equity Investments

Index of contents

List of tables

List of figures

List of abbreviations

1. Introduction

2. Definitions
2.1. Venture Capital vs. Private Equity
2.2. Primary market
2.3. Secondary market

3. History of Private Equity secondary markets

4. Characteristics of Private Equity secondary markets
4.1. Financing stages of Private Equity
4.2. Participants
4.2.1. Sellers
4.2.2. Buyers
4.2.3. Intermediaries
4.3. Reasons for attendance
4.3.1 Liquidity
4.3.2. Returns
4.3.3. Diversification and active asset management
4.3.4. Fund access
4.3.5. Other reasons
4.4. Influence on the primary market of Private Equity
4.5. Market imperfections

5. Secondary transactions
5.1. Process of secondary transactions
5.2. Types of secondary transactions

6. Cogent Secondary Market Model
6.1. Background of the model
6.2. Procedure
6.3. The model
6.4. Predictions of the model

7. New markets and investment opportunities
7.1. Securitization
7.1.1. Overview
7.1.2. Process of a Private Equity securitization
7.1.3. Motivations and outlook
7.2. IPOs of Private Equity funds
7.3. Online Exchanges

8. Conclusion and outlook

9. Appendix

10. References

List of tables

Table 1: Fund Return & Standard Deviation

Table 2: Historical Return Correlation Coefficients

Table 3: Regression Results of Private Equity Secondary Market Model

Table 4: Variable Results of Private Equity Secondary Market Model

List of figures

Figure 1: Global Secondary Transaction Volume from 1996 to 2003

Figure 2: Financing Stages of Private Equity

Figure 3: Structure and Participants of Private Equity Markets

Figure 4: Participants of Private Equity Secondary Markets

Figure 5: Secondary Transaction as an Portfolio Management Tool

Figure 6: Comparison of Primary and Secondary J-Curves

Figure 7: Effect of Adding Secondary Investments to a Primary Portfolio

Figure 8: Process of a Secondary Transaction

Figure 9: Types of Secondary Transactions

Figure 10: Private Equity Secondary Base Distribution

Figure 11: Secondary Market Preference for Relatively Funded Positions

Figure 12: Secondary Transaction Volume - Forecasts Based on the Cogent Secondary Market Model

List of abbreviations

illustration not visible in this excerpt

1. Introduction

Private equity is an asset class with one notorious problem: illiquidity. First, investments are made without an exit option prior the determined maturity and second it is nearly impossible to purchase an interest of an existing private equity-fund.¹

For the last few years these issues have been changing due to the development and the emergence of a secondary market in the field of private equity (PE) which opens new investment opportunities and “provides investors with liquidity in an extremely illiquid asset class.”² The main market indicators are growth and maturity. Especially in the financial sector of secondary markets the development of these indicators should be named.³ The PE secondary market is in a very early state and far from institutionalized markets like stock exchanges. Heavy market imperfections are a problematic characteristic in this context. Buyers and sellers have to meet privately and negotiate an agreement. Holding an asset for such a long period like in PE can be very unnatural and difficult in a fast moving world in which the need for liquidity and changing regulations, economic situations or other issues emerge very quickly. In consequence, an efficient secondary market seems to be important and necessary to face these problems and give investors the ability to participate and unload assets when circumstances force them to do so.

The PE secondary market is a relatively new phenomenon and is characterized by steady movement, change and development. Experts from market leading secondary funds and advisory services attest the PE secondary market an essential progress. The PE secondary market transforms from a market for unloading poor performing assets, to an instrument for providing chances in the way of an active portfolio management tool.⁴

This Bachelor Thesis, titled “Secondary Markets of Private Equity Investments – An Analysis” ]has the main target to give a prevailing and critical overview of this subject. The academic literature in this field is at an early stage of development, so the fundamental literature for this Bachelor Thesis are articles of PE related journals and two publications: “Private Equity Secondary Markets” by Dominik Damaschke and Patrick Züchner and also “Private Equity Secondary Transactions” by Holger von Daniels.⁵

[...]

¹ See: Damaschke, D. / Züchner, P.; 2006; p.13

² See: Dupont, D.; 2006; p. n. k.

³ See: ibid.; p. n. k.

⁴ See: MacFadyen; K.; 2006; p. 4

⁵ Details on these publications are provided in the references.