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November 17, 2008

Denominator Effect Triggers Boom in Secondary Deals

Fortune has an article on the boom in secondary deals.
The problem is straightforward. Portfolio managers have strict guidelines for asset allocation (Harvard's endowment, for instance, is offloading $1.5 billion in private equity to get back to its 13% target.) As the public markets have collapsed and the prices of liquid assets have plummeted, the value of the overall portfolio, or the denominator, has shrunk. But allocations to venture funds, buyouts, and real estate, which aren't priced often, have held - at least in theory. So a slice that once accounted for 10% of a portfolio now might suddenly account for 15%.

..(The unwinding of PE portfolios) is starting to happen, with Harvard, Duke, and others unloading alternative-asset portfolios or portions of them. If they aren't already, say industry insiders, practically every big endowment or pension fund soon will be putting something up for sale.

...Some buyers are bidding as little as 50 cents on the dollar; earlier this month, according to industry sources, Lehman Brothers sold part of its $3 billion private equity portfolio at a 50% discount. As prices fall, the volume of these transactions is soaring. Larry Allen, managing member of NYPPEX, estimates that there will be some $27 billion in private equity secondary deals this year, up from $18 billion in 2007.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in