GLOBAL - Pension funds will be the "next wave of sellers" of secondary interests in private equity, says Vincent Gombault, managing director at AXA Private Equity.
The trend is already taking hold in the US, where CalPERS sold an $800m (€554m) portfolio to AlpInvest back in April, for example, and Gombault expects European institutions to follow suit.
IPE recently reported findings from the 14th Coller Capital Global Private Equity Barometer - a survey of 110 global limited partners of all types - suggesting that one-third of North American LPs, one-quarter of European LPs and as much as 42% of Asia-Pacific LPs plan to sell secondaries within the next two years (while only 22% of survey respondents had ever sold in the market when surveyed in 2008).
"The numbers from Coller Capital sound a little bit aggressive," said Gombault - but nonetheless AXA Private Equity, which launched a $2.9bn secondaries fund in 2006-07, is clearly already beginning to find greater supply of attractive opportunities in the market.
Today it announced a $740m purchase of limited partnerships and co-investments in buyout interests from Barclays, which follows the 8 June closure of a deal to buy $1.7bn worth of buyout funds and direct stakes in companies from Citigroup.
Along with its acquisition of a $1.9bn portfolio from Bank of America in 2010 - that year's biggest secondaries transaction - these deals confirm the trend for banks to divest their private equity interests to prepare for the enforcement of Basel III and the Volcker Rules and refocus on core business.
These sales are far from distressed. Banks have time to prepare for the new regulatory environment, and they were not prepared to sell at the prices that were being demanded by secondaries buyers during the depths of the financial crisis in 2008 and 2009, when discounts on the very few deals that did get done peaked at 40% or more.
"We are seeing more deals out of banks not because they are distressed, but quite the opposite, because pricing is now at a level where they can manage the impact of a sale on their earnings," said Gombault.
"We almost don't care about the discount on the assets we buy. If you buy poor-quality assets, the discount will never be enough. Discounts are the wrong way to play secondaries."
If banks' private equity interests are not being sold at stressed valuations, they are nonetheless often very high-quality assets.
However, the dynamics that will trigger what Gombault calls the "next wave" of selling out of pension funds will be very different - less about regulation (although Solvency II may affect decision-making at some European funds) and more about resources.
"Very often the private equity teams in the US pension funds are very small - even the bigger teams are two or three people, even CalPERS has only a handful of people dedicated to private equity," said Gombault. "They may be running 200 or more relationships. That means you don't know your portfolio or your managers - let alone all of your assets. LPs need to focus down to 60-70 names at the most."
That will inevitably mean pension funds will concentrate commitments with their very best general partners - potentially leaving the scraps for the secondary market.
"When we buy assets from pension funds, we will be especially cautious," Gombault confirmed. "Not all assets will be of high quality - but some will be."
As pension funds increasingly turn to the secondaries market as buyers to manage their private equity commitments more dynamically, they should be aware that quality and pricing should properly reflect the incentives that are leading their own peers on the sell side to divest.
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