Beware of PE secondaries “rubbish” as dealflow rises, valuations drop

Investors in the private equity secondaries universe must be selective as more assets, including distressed assets, come to market and valuations seem set to head south.

Marleen Groen, chief executive of Greenpark Capital, recently told a gathering of Australian pension funds representing $450 billion in retirement assets that due diligence was more important now as more private equity asset holders sought a premature exit through the secondaries market.

“The name of the game for returns is to be very selective,” Groen said.

She said assets were still priced at September 2008 valuations, and that the information underlying them was often opaque.

Valuations were expected to be revised downwards in the next few months, she said.

Groen expected between US$100 billion and US$130 billion would be invested in the next two years, and that about US$30 billion of these assets would be unworkable.

“The real rubbish won’t be sold in this market; the supply of capital is not enough.

Most of the sellers coming to market were showing signs of liquidity stress.

“Quite frankly, why would you be selling in this market if you weren’t distressed? Major discounts are the only way that these people can make transactions.

“There are deals being done at negative pricing, where the seller… actually pays the buyer for the risk of taking on these obligations.”

She expected between 20 and 40 per cent of private equity managers would disappear, and advised investors to consider liquidating their older vintages.

“Older investors in private equity should consider selling-off older parts of their portfolio on which they have already earned a decent return, and within which the visibility is quite good.”

Secondaries originated from large leveraged buy-outs made in the last bull market were risky, as these deals were based on “excessive pricing and leverage that was dangerous”, and mid-market secondaries showed better deals.

“In the mid-market exits are being achieved even though banks have stopped lending.”

Groen claimed that US$1 trillion in assets had been committed to private equity worldwide.

In 2008, US$20 billion in dealflow entered the secondaries market.

Most of the assets on offer now were coming from the US market, she said.