PSG - Market Overview
Many limited partners are evaluating ways to mitigate risk and rebalance their portfolios in response to the current dynamic economic backdrop and associated changes in private equity markets. One portfolio management tool sophisticated investors actively utilize is the sale of limited partnership interests in the secondary market.
Current Secondary Market Condition
Limited partners are accessing the secondary market to achieve a wide range of objectives:
- Compensating for protracted hold periods of portfolio companies resulting in deferred realizations
- Paring the number of general partner relationships
- Increasing the velocity of investment dollars by selling portions of their largest holdings, including recently, those made in large-cap buyout funds
- Freeing up capital to pursue the types of exceptional opportunities available in years following market surges (e.g., 2001-2002)
- Benefiting from more and faster transparency in portfolios due to recent accounting changes (FAS 157), leading to pro-active risk management
- Correcting for over-allocations to private equity due to shrinkage in the overall portfolio caused by market conditions
- Including real estate limited partnership interests within the scope of secondary sales efforts
Demand dynamics in the secondary market for limited partnership interests are very strong:
- The sheer purchasing power of secondary funds, which is currently estimated at over $50 billion, has kept the demand for secondary positions strong
- However, economic uncertainty has put pricing pressure on many portfolios
- In addition to active secondary funds, many new or expanding limited partners seek to backfill and gain exposure to vintage years and or market segments
Action Steps
Tapping the secondary market in a variety of traditional and innovative structures is now a widely accepted tool that institutional investors use to maximize returns and manage risk in alternative investment portfolios. PSG’s market-leading practice can help you evaluate and choose among your liquidity options, and then execute a successful strategy to achieve your goals. While the market dynamics remain favorable, our mission is to provide you with risk management tools to objectively evaluate whether or not a secondary sale of limited partnership interests can achieve your portfolio goals. Our responsibility is to our clients: providing objective advice that is both strategic and, where appropriate, transactional, in support of a long-term, mutually beneficial relationship.
