Under the spotlight
The rapid growth of secondary deals has put the practice increasingly under the spotlight – and not always in a positive light. Many investors in private equity funds are vociferous in their dislike of secondaries, especially when holding both the buying and selling fund, which leaves them effectively retaining their original asset, but, as they see it, at a cost. Pass-the-parcel tag lines, distressed sales and below fair-market pricing have also not helped the reputation of this type of deal.
But, what was initially a relatively niche market, is showing a marked evolution as the private equity industry itself matures to deal with changing market conditions. Today, secondary deals are increasingly mainstream, with private equity groups trading assets at or above estimated market values, often as a tool of active portfolio management.
The global credit crisis has been responsible for much of this shift. With stock market listings difficult to achieve and debt less available, secondary deals offer a viable exit route for many funds, allowing them to achieve liquidity and to unravel any remaining unfunded obligations.
In Europe in 2011, for the first time, secondary deals between private equity groups exceeded those of sales to non-private equity buyers and listings combined. In India, where until now secondary deals have represented barely 5% of trades, an upward trend is emerging as companies reach the end of their investment cycles and find opportunities for strategic sales and IPO’s few and far between And, undeniably, secondary deals do have attractive features:
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