One of the interesting dynamics in the secondaries market is seller expectations. In some cases, an investor is so desperate to unload its portfolio that it ends up taking a price lower than what the market will bear. Conversely, other sellers refuse to accept that their 1999 partnerships aren’t as valuable as they might have been a couple years ago.
Many in the latter category are high-net-worth individuals whose portfolios have declined considerably since the market bust of 2000 but are nonetheless reluctant to sell, often waiting until a capital call forces them to. “What really drives their interest in selling is when they get the next capital call notice,” says Cliff Meijer, principal with Thomas Weisel Global Growth Partners. “That’s usually when the alarm goes off.”
But sometimes even the most desperate sellers have unrealistic expectations. “They want the number that it was worth last year,” says Jerrold Newman, president of Willowridge Inc. “That’s what happens with individuals… it’s hard for them to accept the losses.”
Newman says that’s partly because individuals look at their returns on an absolute basis, while larger institutional investors can appreciate relative returns. “The problem is the individuals take this personally,” he says. “The institutions are less emotional about it.”
One reason the larger investors aren’t as emotional about selling is because they’re more likely to obtain a favorable price for their assets, often through the auction process. “For a quality portfolio you can get what many perceive to be excellent pricing,” says Scott Myers, managing director at Cogent Partners.
But secondary pros say banks can be particularly hard-nosed during negotiations, too. “The banks, in particular, want to have their cake and eat it too. They want to sell the portfolio but not take a loss,” says Meijer. “Unfunded commitments are the anchor around their neck.”
In their pursuit of a fair price, some banks and other sellers are coming to market with pieces of portfolios designed for specific buyers. “You do have groups that have bitten the bullet and sold the entire portfolio,” says Meijer. “But other institutions are taking a more measured approach trying to matchmake certain assets with certain buyers who are willing to pay very narrow discounts or even premiums, for those assets.”
At the end of the day, though, the best pricing for the seller is usually achieved when it has a large, relatively healthy portfolio to sell. “The pricing of a portfolio is directly proportionate to the size and the makeup of the portfolio,” says Meijer. “If you have a multimillion-dollar portfolio that is a very attractive way for a large secondary fund to deploy capital.”