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 equityfund.
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.” The main market indicators are growth and maturity. Especially in the financial sector of secondary markets the development of these indicators should be named. 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. 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.
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.
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