Secondary Buyers Blew It Last Year: Prices Rise in 2010

Secondary market prices for private equity funds are on the rise, according to a report being released tomorrow by Cogent Partners.

The data looks at transactions from the first half of 2010, and finds that average high bids rose to 79.6% of NAV from 72% of NAV during the second half of 2009. Buyout funds were particularly hot, increasing to 86.4% from 68.9 percent.

All of this leads me back to an argument I began making nearly a year ago: Secondary buyers blew it in 2009. They had a record amount of dry powder, but were paralyzed by fears that new deals would be like trying to catch a falling knife. “The sellers will cave,” secondary buyers thought, “particularly as their liquidity squeeze tightens.”

But they were wrong. The public equity market rally meant that liquidity concerns actually decreased, meaning that sellers could hold out for higher prices. Moreover, that same rally caused PE funds’ NAV to rise — particularly amount mega-buyout funds — meaning that buyers were faced with a pair of price boosts. Finally, secondary funds faced some internal pressures of their own, due to an excess of dry powder caused by last year’s depressed deal volume.

A few other notable findings from the Cogent study:

• “The composition of sale portfolios has migrated back to predominately funded assets, as sellers look to take advantage of increased pricing to actively manage current NAV exposure. The average fund marketed in H1 2010 was 73.6% funded versus the average fund in H1 2009, which was 60.6% funded.”
• “Despite the return to sales of funded assets and a re-engagement of many traditional buyers who were largely inactive for much of 2009, non-traditional buyers continue to successfully participate in the secondary market. A non-traditional buyer was the high bidder on over two-thirds of the funds that received bids from non-traditional buyers in H1 2010.”
• VC funds accounted for just 2% of all funds pitched on the secondary market in H1 2010. They typically represent between 25% and 33% of the total. Cogent writes: “To be clear, potential sellers have an interest in parting with portions of their venture fund portfolios, but holding these funds continues to be relatively more attractive given the discount to NAV at which most venture funds are likely to transact.”

You can get the full study tomorrow at the Cogent Partners website.