GUIDING INSTITUTIONAL INVESTORS TO MAKE THE BEST TACTICAL DECISIONS FOR THEIR PRIVATE EQUITY PORTFOLIO.
Current Market Opportunity
Complementing our favorable outlook for primary fund and co-investments, PCG AM believes that a custom-tailored secondary strategy consisting of targeted secondary fund investments and direct secondary transactions will be an integral component of a successful private equity program going forward.
The financial crisis of 2008-2009, and the resulting decline in liquidity, has led to a spike in the supply of secondaries and a strong buying environment for secondary investors. Financial institutions and other sellers that invested heavily in private equity during recent vintage years are now compelled to raise capital through secondary sales, particularly as the pricing environment has stabilized. Similarly, institutional investors that are over-allocated to private equity due to steep declines in the market values of other asset classes (known as the “denominator effect”) are using secondary sales to reduce their relative exposure to private equity. The expected pick-up in capital calls for 2010 and 2011 will most likely reinforce this trend.
While slowed by economic uncertainty in 2009, the secondary market is poised for a rebound in 2010 and beyond as supply remains robust and strong fundraising has created pent up demand. Additionally, with economic stability on the horizon, rising prices have narrowed the bid-ask spread between buyers and sellers increasing the proportion of secondary offers actually consummated. Near-term supply will be driven by the continued need for liquidity, particularly as the return of principle investment activity and capital calls among primaries force stressed investors to become secondary sellers. Additionally, institutional limited partners that are burdened by concentrated exposure to recent vintage years will actively use the secondary market to rebalance portfolios in the near term in order to optimize commitments for evolving market opportunities. These cyclical contributors to short term supply are additive to the market’s long-term fundamentals, where growth will be driven by the massive increase in primary commitments from 2004 to 2008 combined with the market’s transition from “buy and hold” to dynamic rebalancing strategies, which have contributed to rising turnover rates.
In order to capitalize on this opportunity and achieve increased risk-adjusted returns, it is imperative to seek the counsel of an experienced advisor, particularly as pricing stabilizes and the benefit of information advantages becomes more pronounced.
PCG AM value add
PCG AM has the knowledge, skill, and experience to strategically navigate the secondary market to help guide institutional investors to make the best tactical decisions for their private equity portfolio. Our extensive network of investors, primary and secondary fund managers, and intermediaries, combined with our access to portfolio company information and direct experience as acquirers and sellers of secondary interests, uniquely position our firm to provide a full range of services when reviewing alternatives in the secondary market.
PCG AM’s principal value-add is our demonstrated track record and ability to appropriately price interests to generate net returns with a target in excess of 25%.1 This capability results from our proprietary 20-year database of over 500 funds and more than 5,000 portfolio companies which affords PCG AM and its clients a competitive information advantage in understanding the true intrinsic value of funds being sold in the market, as well as access to substantial deal flow.
Purchases: PCG AM has a track-record of successfully helping clients formulate and execute strategies for purchasing secondary market positions. These purchases have historically focused on existing PCG AM fund relationships or funds held in a client’s portfolio through primary commitments, but we are adept at purchasing broader private equity portfolios which may include funds that are new to our client. PCG AM’s independently verified track-record for secondary purchases has produced net returns in excess of 35% over the last ten years.1
Sales: In addition to purchases, PCG AM’s information advantages and market presence have also allowed the firm to outperform the market with respect to secondary sales. The case study below highlights a recent example where PCG AM was able to facilitate a customized offering that secured pricing well above the prevailing market benchmark.
PCG AM was retained by one of its clients to review active management strategies to help generate liquidity and reduce the institution's overall administrative burdens.
Ultimately, we advised this client to sell a select non-core portion of its private equity portfolio on the secondary market. To execute this plan, PCG AM conducted a strategic review of the client's private equity program to determine which portfolio of non-core fund interests would generate the greatest amount of liquidity. We then valued these assets using our proprietary database and analytics and provided this data to select secondary firms and institutions that acquire seasoned funds and portfolios. Given our market presence, we were able to identify a targeted list of potential buyers that would maximize the overall purchase price. PCG AM then addressed all questions and information requests from this bidder pool and created an online data site to facilitate the bidding process. At the conclusion of the bidding process, PCG AM prepared a summary of all the bids and opined on the most attractive offers from both an economic and probability of completion standpoint.
The client was very pleased with the end result, as PCG AM was able to secure a purchase price above 90% of the portfolio's net asset value ("NAV") - a particularly impressive result given that most secondary sales in the latter half of 2008 were priced at a 30-40% discount to NAV. 2
2 Past performance may not be indicative of future results. The client identified above is the client that PCG Asset Management advised on secondary purchase in 2008. It is not known whether the client approves or disapproves of PCG Asset Management or the advisory services provided.