2005 Outlook: Secondaries –

The secondaries market is so hot that Jay Pierrepont barely spends any time in his San Francisco office. “Basically I’ve traveled 100,000 miles to date,” he said recently, after closing a $900 million secondary fund for Pantheon Ventures. Pierrepont has been doing secondary deals for about 16 years as the leader of Pantheon’s global secondary group. He called on LPs from every corner of the globe for the new fund, and about 70% of the commitments came from outside the United States. Even though the fund-raising is done, Pierrepont will continue to traverse the globe: He oversees offices in Brussels, London, Hong Kong and Sydney.

Q Have you noticed public pension plans putting assets on the secondary market because of FOIA issues?

A The FOIA issues are preventing groups, public plans in particular, from investing in certain funds going forward. It is a barrier that they have to contend with. Having said that, for most of the funds-with the possible exception of Sequoia and one or two others-those that have public plans are not asking them to divest their holdings. Most may be preventing public plans from coming back in, but they aren’t asking the [public pension] plans to sell out.

Are you seeing more public pension plans enter the secondary market for reasons not associated with disclosure?

They’re entering on all levels. Public plans are looking to do secondaries more and more and potentially do them directly. Secondaries are definitely becoming more of a portfolio management tool and plans are looking at them. People sell because of regulatory reasons, financial distress, because of a change in strategic focus. It’s the latter that I think is causing some plans to really think about how much money they want out in a certain vintage year or behind a certain fund manager. We are seeing more and more of those sales coming into the marketplace.

Are secondary buyers starting to look at venture assets more favorably?

Yes. If you looked at venture in 2000 after the first quarter to 2003 it was like catching a falling sword. Even if you bought it at a huge discount, even the best fund managers were writing down their portfolios at such a rate that almost no discount that a buyer would be willing to attempt at that time would compensate for the write-down. Basically very few people were brave enough to tread in those years and those who did didn’t buy their venture capital funds at a large enough discount to make it worth their while. As more competition has come into buyouts, several of the secondary players are thinking about going further a field and finding it’s about time to look at venture. You have better market fundamentals in venture capital: No longer are net asset values plummeting. More competition for buyout secondaries is forcing more secondary buyers into the venture arena.

How do you see the fund-raising market for secondary groups in 2005?

The story has yet to completely unfold. You’ve had very robust deal flow for secondaries. There are no all-encompassing industry statistics on how much is being sold in a given year. Most secondary buyers would say they had a very strong year in terms of deal flow. The concern is that if you look at the money that went into private equity it took a major dive in 2000. You’ve had decreasing flows of capital into private equity for the first couple of years of this decade and, in turn, to counteract that you had secondaries becoming more of a portfolio management tool.