Guide to the Secondary Market

Transcription

1 PRIVATE EQUITY ANALYST Guide to the Secondary Market 2015 Edition Sponsored by:

2 Transforming the alternative asset industry by making risk more manageable and private equity transactions more efficient Portfolio Advisory (GPs & LPs) Qualified Matching Services (IRS ) Block Trading (Minimum $10 million) Transfer Administration (Issuer Services) Independent Portfolio Pricing (Topic 820) Risk Monitoring Analytics Independent Due Diligence Principal Investments SECURITIES OFFERED THROUGH NYPPEX, LLC. MEMBER FINRA SIPC. COPYRIGHT ALL RIGHTS RESERVED.

3 Guide to the Secondary Market 2015 Edition Editorial Laura Kreutzer, David Smagalla, Hillary Canada, Yuliya Chernova, Alec Macfarlane Research Brendan Hughes, Victoria Camporeale Bradley, Sean Curran Advertising Joseph Koskuba, James Lindquist Production and Design Tara S. Cooper, Heather Graham, Tim White Editorial Director Nicholas Elliott Tel or Dowjones.com/privatemarkets ISBN# / Guide to the Secondary Market published May 2015 by Dow Jones & Company, Inc., located at 1211 Avenue of the Americas, New York, New York Dow Jones & Co. is a News Corporation company. Cover Price: $195. Contact newsletters.support@dowjones.com. Copyright 2015 by Dow Jones & Company, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of Dow Jones & Company, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Dow Jones & Company, Inc., its officers, employees, or agents may hold positions in any of the securities mentioned herein. Photo credits - cover: beboy/shutterstock.com; p3, p7: istockphoto.com/apcincy; p4: Akos Nagy/shutterstock.com; p11: gualtiero boffi/shutterstock.com; p13: istockphoto.com/ismagilov; p15: eyeidea/shutterstock.com; p16: Andrey Armyagov/shutterstock.com; p22: istockphoto.com/peopleimages; p27: istockphoto.com/ssuni; p28: istockphoto.com/mevan; p29: istockphoto.com/maxuser; p30: AFNR/shutterstock.com 55% recycled fiber 30% post consumer fiber

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5 Guide to the Secondary Market [ 3 ] Table of Contents I. Introduction II. III. Preface 4 By Laura Kreutzer, Assistant Managing Editor, Private Equity Secondary Market Goes Mainstream, as Deal Volume Hits New High 6 By Hillary Canada Strong Pricing Brings Sellers to the Table, but Will the Market Overheat? 16 By Laura Kreutzer Secondary Market Posts Record Year in 2014, Although Estimates Vary 22 By Laura Kreutzer Secondary Market Timeline 24 Deal Volume and Fundraising, Real Estate Secondary Volume Continues Growth Trajectory 26 By Hillary Canada Secondary Buyers Prepare for Wave of Energy Fund Sales 27 By Alec Macfarlane Buy-Side Broker Boom Brings Risks and Rewards to Secondary Market 28 By Laura Kreutzer Secondary Market Offers Seed Funds an Exit Option but Few May Use It 29 By Yuliya Chernova Secondary Funds Continue to Reap Rewards of Strong Exit Market 30 By David Smagalla Sponsored Article The Rise of Real Estate Secondaries 33 By Andrei Brougham of Greenhill Cogent Firm Listings Secondary Market Buyer Listings 34 Secondary Direct Manager Listings 58 Intermediary Firm Listings 62 Roughly two out of three survey respondents said they anticipated 2015 to be a record year for volume...but other respondents saw the blockbuster year in 2014 as an outlier, driven by those large portfolios, and didn t expect the same dynamics to materialize during Secondary Market Goes Mainstream, as Deal Volume Hits New High, p.6 IV. Appendixes A. Investors That Have Backed Secondary Funds 70 B. Secondary Market Buyer, Interests Sought 74 C. Secondary Market Buyer & Direct Manager, Geographic Preferences 76 D. Secondary Market Intermediary, Types of Clients Represented 78 E. Secondary Market Intermediary, Average Size of Deals Represented 79 V. Indexes Company Name 80 Contact Name 83

6 [ 4 ] Guide to the Secondary Market Preface When we last published this report a year ago, we marveled at how the secondary industry had taken on many of the same characteristics seen in the industry back in Pricing for certain portfolios, particularly buyout funds, had once again approached aggressive levels, in some cases even hitting 100% of a portfolio s underlying net asset value. At the same time, an abundance of capital available for secondary deals and free-flowing cheap debt to finance them drove an abundance of deal volume. It was hard to imagine the market could get any more ebullient. Yet, a year later, that s exactly what has happened. As 2015 progresses, however, the forces that helped drive secondary deal volume to record levels in 2014 also appear to be raising concerns among some buyers that the market is getting overheated. For the first time in a long time, more secondary buyers have begun to question whether the market has entered a bubble, particularly for what they commonly refer to as flow funds, or stakes in megabuyout funds. In this edition of the Dow Jones Guide to the Secondary Market, our survey results illustrate some of those emerging concerns, with some 94% of buyers surveyed characterizing the current market as a seller s market. At the same time, more than three-quarters of buyers in this year s survey say they feel pricing is too high. However, as the secondary market has diversified, buyers still point to pockets of deal flow where pricing is often less efficient, such as in general partner restructurings and in more complex transactions involving portfolios of direct stakes in companies or groups spinning out of large financial institutions. They also acknowledge that although strong pricing puts pressure on future returns, it also attracts more sellers to the market. Even a bubble may have its benefits. We hope that this edition of our secondary guide will help illuminate emerging trends in the market and also provide a useful resource for prospective sellers and GPs who want to identify possible buyers for certain types of assets. As always, we welcome your feedback on how we can improve the content for future editions. Sincerely, Laura Kreutzer Assistant Managing Editor, Private Equity Dow Jones & Co.

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8 [ 6 ] Guide to the Secondary Market Secondary Market Goes Mainstream, as Deal Volume Hits New High By HILLARY CANADA In addition to being a record year for secondary volume, 2014 may be the year that finally smashed some lingering myths about the secondary market. What Percentage of Secondary Deals You Do is Due to: 50% 46% 45% The idea that the market would attract forced sellers has been fading for years, and all but completely disappeared during 2014 as limited partners, flush with cash from the record distributions of their general partners, shopped portfolios large and small as a way to refine their holdings. Meanwhile, the dynamics surrounding a nascent part of the market, general partner restructurings, slowly have started to shift. No longer the exclusive province of the lumbering zombie fund, restructurings and the selling of tail-end assets are slowly becoming more commonplace among wellperforming GPs, said industry experts Economic concerns of inexperienced investors/distressed 29% 24% 23% 25% Regulatory changes 20% 15% Their use as GP a portfolio recapitalizations management tool (or fund restructurings) 18% 20% 8% Other Those two trends, of portfolio management and of GPs seeking solutions for aging funds, are expected to drive deal flow in 2015, but secondary buyers polled by Dow Jones in our annual secondary survey were divided over whether secondary volume in 2015 would match or exceed 2014 levels. Deal value, which hit record levels in 2014 (see page 22 for the various volume estimates), was driven partly by roughly a dozen billion-dollar-plus transactions that came to market, including portfolios from General Electric Co. s GE Capital, Pennsylvania Public School Employees Retirement System and J.P. Morgan Chase & Co. Do You Expect This Year to Be a Record Year for Secondary Deal Volume? 100% 32% 34% 47% Mean Median Source: Guide to the Secondary Market, 2015 edition Roughly two out of three survey respondents said they anticipated 2015 to be a record year for volume as well, citing good pricing for sellers, more opportunities for GP restructurings and an aging set of funds in Asia potentially fueling supply. The survey reflected responses from 57 buyers, including some of the industry s largest players. Other respondents saw the blockbuster year in 2014 as an outlier, driven by those large portfolios, and didn t expect the same dynamics to materialize during Eric Zoller, partner and co-founder of secondary adviser Sixpoint Partners, said he was skeptical 2015 would be marked by the same amount of big ticket transactions. The exception may be in real estate secondaries, where Mr. Zoller and others said they anticipated increased activity and larger portfolios to manifest. 68% 66% 53% Pent-Up Demand The prevalence of large transactions meant that a handful of buyers accounted for a disproportionate percentage of deal volume, according to Mathieu Dréan, a managing partner at placement agent Triago Yes No Source: Guide to the Secondary Market, 2015 edition % Other players were equally eager to get deals done, said Mr. Dréan, adding those buyers in the market who didn t deploy as much capital as they would have liked in 2014 have greater incentive to make investments in 2015.

9 Roughly two out of three survey respondents said they anticipated 2015 to be a record year for volume...but other respondents saw the blockbuster year in 2014 as an outlier, driven by those large portfolios, and didn t expect the same dynamics to materialize during Guide to the Secondary Market [ 7 ]

10 [ 8 ] Guide to the Secondary Market For its part, Triago estimates transaction volume in 2015 will reach between $35 and $40 billion, but predicts fewer large transactions and a wider diversification of buyers. Roughly 44% of survey participants said they saw new competition for deals during 2014, from limited partners including family offices, endowments and foundations. The massive wave of distributions that has washed over LPs portfolios may serve to accelerate secondary buying among LPs as they seek to invest capital quickly. Through the first quarter, Mr. Dréan said Triago already had transacted with between 12 and 14 unique buyers a much higher figure than usual. In a given year, we usually end up transacting with 22 to 25 distinct buyers, he said, adding that interested buyers run the gamut from dedicated secondary funds, funds of funds, insurance companies, private offices and others. The big theme for all LPs these days is to try to optimize the deployment rate, said Mr. Dréan. They re eager to do secondary deals. They re clearing the deck of massive amounts of money. He added those types of buyers would stick primarily to simpler and smaller transactions. As it did in last year s survey, portfolio management remains the primary driver of secondary deal volume, accounting for an average of 46% of deal flow among this year s survey respondents, up from an average of 40% in a similar survey conducted last year. Many sellers are working on portfolio solutions, but are waiting for the year-end numbers or even the March 31 numbers to come through, said Benoît Verbrugghe, head of the U.S. office at Ardian. We think that [in] the second quarter, you will start to see new transactions coming in the market. Shifts in strategy, staffing changes and an overall appetite to rebalance were among the underlying motivators for some sellers in 2014, said Mr. Zoller. As these types of pruning transactions have become more commonplace, Triago calculated that the average portion of a portfolio that will end up in secondaries is close to 20%. Percentage of Funds Going to Small/Large Deals Median Percentage 100% Current Fund 70% 75% Stakes With NAVs Less Than $15M in Size Prior Fund Source: Guide to the Secondary Market, 2015 edition No sophisticated institutional investor today thinks about private equity commitments as just buy and hold, Wilson Warren, a partner at New York-based Lexington Partners told Private Equity Analyst in April. They know that they will have to do something actively with their portfolio over time, or the portfolio will end up being too disparate. Don t Bank On Financial Institutions Regulatory changes in the U.S. and Europe drove an average of about 29% of transactions, according to survey respondents, in line with last year s figures. But industry experts predict that well is close to running dry, as those financial institutions that continue to hold private equity assets on their balance sheets cling tightly to those investments. Banks and insurance companies have been creative in delaying sales in hopes that regulation would change, said Mr. Zoller. A two-year extension that gives banks until 2017 to comply with the Volcker rule in the U.S. means that such 50% 55% 8% Stakes With NAVs Larger Than $15M in Size Did You Participate in Any GP or Fund Restructuring Deals Over the Past Year? Do You See Competition From New Sources for Deals? 40% 60% Yes No 56% 44% Yes No Source: Guide to the Secondary Market, 2015 edition Source: Guide to the Secondary Market, 2015 edition

11 Leading the way in secondary investing LGT Capital Partners is a leading private equity fund of funds manager and secondary specialist with over USD 23 billion in commitments and is acquiring private equity interests actively and discretely. LGT Capital Partners provides portfolio management and liquidity solutions since 1997 and leads secondary investments in: Buyout and Venture Capital partnerships European, US and Asian assets Special situations (unfunded positions, direct secondaries) For further information please contact André Aubert (andre.aubert@lgt.com) or Sascha Gruber (sascha.gruber@lgt.com) LGT Capital Partners Secondaries House of the Year 2014 Best Launch Alternative Fund of Funds LGT Capital Partners Crown Asia-Pacific Private Equity II Pfaeffikon New York Dublin London Vaduz Dubai Beijing Hong Kong Tokyo Sydney lgt.cp@lgt.com Pfaeffikon, New York, Dublin, London, Dubai, Beijing, Hong Kong, Tokyo lgt.cp@lgt.com

12 [ 10 ] Guide to the Secondary Market Select Secondary Funds in the Market or Recently Closed Fund Name Investing Firm Name Fund Region Target (M) LP Secondaries Total Amt. Closed (M) Adams Street 2013 Energy Fund LP Adams Street Partners U.S. $500.0 N/A Ant No. 2 Greater China Secondary Fund Ant Capital Partners Co. Asia/Pacific $150.0 N/A Ardian Secondary Fund VII LP Ardian Global $9,000.0 N/A AXA Secondary Fund VI LP Ardian Global $4,000.0 $6,000.0 Bowside Capital Fund III LP* Bowside Capital U.S. $35.0 $37.7 Capital Dynamics Secondaries Fund IV LP Capital Dynamics U.S. $500.0 $107.0 Coller International Partners VII LP Coller Capital Global N/A N/A European Secondary Development Fund V LP Arcis Group Western Europe $478.8 N/A DB Secondary Opportunities Fund III LP Deutsche Asset & Wealth Management Global N/A $1,650.0 Euro Choice Secondary Fund Akina Partners Europe Fort Washington Private Equity Fort Washington Investment Advisors U.S. $150.0 $150.0 Opportunities Fund III LP* Global Market Fonds Secondary V RWB PrivateCapital Emissionshaus AG Global N/A N/A Greenspring Secondaries Fund I LP* Greenspring Associates Global N/A $87.0 Idinvest Secondary Fund II* Idinvest Partners Western Europe $258.8 $283.9 Industry Ventures Partnership Holdings III LP* Industry Ventures U.S. $100.0 $170.0 Landmark Equity Partners XV LP* Landmark Partners Global $2,500.0 $3,250.0 Lexington Capital Partners VIII LP Lexington Partners Global $8,000.0 $10,100.0 Lexington Middle Market Investors III LP* Lexington Partners U.S. $750.0 $1,070.0 Mantra Secondary Opportunities Mantra Gestion Global $55.8 $59.2 Montauk TriGuard Fund VI LP* Montauk TriGuard U.S. $500.0 $500.0 Pantheon Global Infrastructure Fund II LP* Pantheon U.S. $700.0 $1,000.0 Pantheon Global Secondary Fund V LP Pantheon Global N/A $1,118.7 Partners Group Real Estate Secondary Partners Group Western Europe $750.0 N/A 2009 (Euro) SCA SICAR* Partners Group Secondary 2015 LP Partners Group Global $3,024.8 N/A Permal Private Equity Opportunities V Permal Group U.S. $500.0 $178.2 Pomona Capital VIII LP* Pomona Capital Global $1,300.0 $1,750.0 Segregated Fund I* Northleaf Capital Partners Global N/A $150.0 SL Capital Secondary Opportunities Fund II SL Capital Partners U.S. $200.0 $171.0 Stockwell Secondary Holdings LP* Stockwell Secondary Holdings LP U.S. $364.1 $364.1 Strategic Partners VI LP* Blackstone Group Global $3,500.0 $4,400.0 Unigestion Secondary Opportunity III Unigestion Global $340.2 N/A Secondary Direct/Portfolio 17Capital Fund 3 LP* 17Capital Western Europe ACG European Secondary Fund ACG Capital Eastern Europe/CIS $206.6 N/A Akkadian Ventures Annex III LP* Akkadian Ventures U.S. N/A $5.6 Akkadian Ventures III LP* Akkadian Ventures U.S. $35.0 $69.0 Azini 3 LLP* Azini Capital Partners U.S. N/A $100.0 Cipio Partners Fund VII Cipio Partners Western Europe $224.0 N/A Core Capital I LP* Core Capital Partners Western Europe $76.9 N/A European Secondary Opportunities II LP Seligman Private Equity Western Europe $103.2 $36.3 continued on next page >

13 Guide to the Secondary Market [ 11 ] BANKS AND INSURANCE COMPANIES HAVE BEEN CREATIVE IN DELAYING SALES IN HOPES THAT REGULATION WOULD CHANGE. Eric Zoller, partner and co-founder of secondaries adviser Sixpoint Partners institutions have even more runway to delay a sale. Meanwhile, in early 2015, bank regulators issued guidance on the Volcker rule that appears to allow foreign banks operating in the U.S. more leeway to hold onto certain types of private equity investments. That said, banks that have held onto assets may have an incentive to sell that s driven more by the generous pricing available than by looming regulatory threats, said Mr. Dréan. It s a good time to rationalize assets and cash out, he said. A group of European lenders, including Standard Chartered PLC, HSBC Holdings PLC and Unicredit SpA, were among those who sold large private equity fund portfolios or initiated plans to do so last year. Perhaps the highest-profile transaction in the bank space last year came as J.P. Morgan agreed to sell roughly half its stake in buyout arm One Equity Partners to Lexington Partners and AlpInvest Partners. J.P. Morgan had said its plan to spin off One Equity wasn t in response to regulatory pressure, but rather was a reflection of the firm s uneven returns and uncertainty over where the unit fit within the bank, The Wall Street Journal reported. Lexington also was behind a deal to buy a substantial portion of a $1.5 billion commitment Citigroup Inc. made to a fund managed by Metalmark Capital. Citigroup moved to shed its ownership stake in Metalmark in late One secondary buyer estimated the remaining value of bank-held private equity assets in the U.S. and Europe at roughly $50 billion. That has dwindled from 2014, when professionals estimated that there were between $60 billion and $85 billion of assets left to sell. Clearly a lot of banks have sold at this point, said Stephen Sloan, a managing partner at secondary intermediary Greenhill Cogent. We don t expect them to be a growing part of the market, though they do still have assets to sell. Select Secondary Funds in the Market or Recently Closed (cont.) Fund Name Investing Firm Name Fund Region Target (M) Total Amt. Closed (M) Secondary Direct/Portfolio (cont.) Founders Circle Capital I LLC* Founders Circle U.S. N/A $160.0 Founders Circle Capital Opportunity Fund I LLC* Founders Circle U.S. N/A $35.0 Headlands Capital Secondary Fund II Headlands Capital Global N/A $80.0 Inveni Secondaries Fund II Follow On Ky* Inveni Capital Western Europe $12.5 N/A Inveni Secondaries Fund II Ky* Inveni Capital Western Europe $81.9 N/A Inveni Secondaries Fund III Ky* Inveni Capital Western Europe $77.5 N/A Jasper Ridge Private Opportunities LP* Jasper Ridge Partners U.S. $177.5 $177.5 JDPT Partners Group (Secondary) LP* Partners Group Western Europe $100.0 N/A Leerink Revelation Healthcare Fund I Leerink Revelation Partners U.S. $175.0 $167.7 Lombard Odier Secondary Fund II Lombard Odier Darier Hentsch & Cie Western Europe $25.0 N/A *Fund held final closing. Sources: Dow Jones LP Source, Guide to the Secondary Market, 2015 edition

14 [ 12 ] Guide to the Secondary Market What Percentage of Secondary Assets Purchased Last Year Fell Outside of Traditional PE or VC? 9% 6% 3%3% 6% 9% 4% 8% 4% None 1% to 10% 3% 57% 16% 59% 23% 62% 11% to 20% 21% to 30% 20% 9% 31% to 40% 41% to 50% More Than 50% Numbers do not add up to 100% due to rounding. Source: Guide to the Secondary Market, 2015 edition Buyers Become Sellers Premium pricing also inspired some historical buyers, including funds of funds, to sell portfolios, allowing them to return cash more expediently to their own limited partners. Private Advisors, Adams Street Partners, HarbourVest Partners and Pantheon were among the funds of funds that opted to explore options on the secondary market during the past 18 months. [Funds of funds] have a view on pricing for most assets they own, and if someone in the market is pricing it materially higher, they re willing to sell, said Greenhill Cogent Managing Director Brian Mooney. Canada Pension Plan Investment Board, one of the industry s most prominent secondary buyers, is among those taking advantage of favorable pricing, exploring the potential sale of a portfolio of stakes valued at between $1 billion and $1.5 billion, Private Equity Analyst reported in April. Percentage of Funds Going to U.S./Non-U.S. Deals Median Percentage 100% % 70% 35% 35% Restructurings Gain Popularity Despite challenges posed by trying to engineer a fund restructuring, the number of such transactions and the number of buyers willing to attempt them continue to increase. Landmark Partners estimates that the number of restructurings increased 35% year-over-year in 2014, with the dollar volume of those transactions rising by 140%, according to Partner Ian Charles. Although GP restructurings accounted for an average of 20% of deal volume among this year s survey respondents, some 60% of our survey respondents said they had participated in a general partner or fund restructuring in So-called zombie funds are becoming a smaller part of the market, said Mr. Charles. Funds with brand-name GPs are now being restructured to provide early, attractive liquidity for LPs who want it, and better alignment and incentives for LPs that want to stay in the fund and GPs that want to improve dynamics around a predecessor fund, he said. Landmark led one such deal for a 2006-vintage fund managed by Intermediate Capital Group, a credit specialist that focuses on North America and Europe. A portion of the fund s existing investors opted to roll over proceeds into the deal, which was financed in part by a small syndicate of investors Landmark assembled. ICG is in the market seeking 2.5 billion for a new mezzanine fund, Private Equity Analyst reported in January. HarbourVest, Morgan Stanley Alternative Investment Partners and Coller Capital are among the other investors which tackled restructurings and financed spinouts during the past 24 months, according to data provider Preqin Ltd. 0 U.S. Deals Current Fund Prior Fund Source: Guide to the Secondary Market, 2015 edition Non-U.S. Deals 8% Yann Robard, who heads secondaries and co-investments at the Canada Pension Plan Investment Board, said these types of deals, which he calls GP solutions, carry some of the same myths and stigmas the traditional secondary market battled in the 1990s.

15 Guide to the Secondary Market [ 13 ] THERE S STILL A LOT OF ADVERSE SELECTION IN THE MARKET...The deals are complex and there s a lot of conflict involved, but if you can construct a solution that allows the LPs to have an option that s better than the status quo, then it can be a win for everyone. Brian Mooney, managing director at Greenhill Cogent There was skepticism, and it was vulture-like from time to time, but that has completely disappeared now, he said, adding that as more these transactions take place, the industry will get more comfortable with them. Although restructurings are becoming more commonplace, industry experts agreed their complexity can be off-putting and such deals can still take unexpected turns. HarbourVest, for example, agreed earlier this year to buy stakes in two Doughty Hanson funds, committing an additional 65 million to a planned fund. Doughty Hanson, plagued by departures and meager returns, announced in April it was abandoning efforts to raise a new fund and would focus solely on managing out its remaining assets, Dow Jones sister publication Private Equity News reported. For anyone to be successful in the fund restructuring space, they ve got to have creativity, flexibility and partner with right kind of manager who has a good relationship with LPs and can balance the needs and objectives of everyone involved, said Mr. Charles. There s still a lot of adverse selection in the market, said Mr. Mooney of Greenhill Cogent. The deals are complex and there s a lot of conflict involved, but if you can construct a solution that allows the LPs to have an option that s better than the status quo, then it can be a win for everyone. Additionally, it would appear that in complicated transactions such as restructurings, size matters. In smaller restructurings, people are hesitant to get involved. It s the same amount of work, the execution risk is higher, and the payoff isn t as great, said Mr. Zoller. The overall percentage of deals being evaluated is higher, but the overall number of deals being executed is probably low, Mr. Zoller added. More and more are getting done, but the amount is less than people think.

16 [ 14 ] Guide to the Secondary Market Deals From Further Afield Even as secondary buyers vie for more typical fund portfolios, they are looking increasingly beyond traditional private equity to pick up interests in other asset classes, including infrastructure, credit, natural resources and real estate. This year, 21% of survey respondents saw more than one-fifth of the assets they purchased last year fall outside of typical private equity or venture capital, up from 15% of survey respondents the previous year and 12% of respondents to a similar survey in One asset class that experienced growth in secondary volume last year was real estate, which accounted for an estimated 10% of total secondary deal volume for the year, according to a report by Greenhill Cogent. (For more on the environment for real estate secondaries, see the article on page 26.) Although the locales of sellers and fund stakes are slowly widening, survey respondents predicted a majority of their fund would be used to purchase U.S. stakes. Respondents predicted they would invest a median of 35% of their current fund in non-u.s. deals, roughly the same percentage as their prior funds, according to the survey data. That figure also is in line with the results from last year s survey. Industry participants largely expect volume in the U.K., Japan, Brazil, Latin America and Australia to stay the same year over year. Japan was home to one of the dozen giant portfolios that hit the market in 2015, as Mizuho Financial Group agreed to sell a portfolio of about $1 billion worth of stakes to Lexington Partners. How Long Did It Take You to Raise Your Last Fund? 23% 32% 5% 2015* 41% 33% 2014 *Numbers do not add to 100% due to rounding. Source: Guide to the Secondary Market, 2015 edition 0-1 year 1 year 1-2 years 2 years Respondents were nearly equally divided over whether volume would increase, decrease or stay the same in Eastern Europe and Russia, which has been plagued by low oil prices and sanctions stemming from its conflict with Ukraine. Nearly a third of investors expected some increase in activity in the Middle East. Abu Dhabi Investment Authority reportedly was shopping a portfolio valued at roughly $2 billion in 2014, Bloomberg Businessweek reported. A Fundraising Bonanza Secondary buyers are well capitalized to take advantage of portfolios coming to market, after a robust year for fundraising. Lexington recently wrapped up its latest core secondary fund with $10.1 billion, ranking it as the largest such fund ever raised. In 2014, meanwhile, several of the industry s biggest names, including Ardian, Blackstone Group s Strategic 5% 19% 43% Select Secondary Deals, Transaction Selling Institution Type Size (M) Status Aberdeen International Inc. Direct Portfolio $29 Landmark Partners bought the portfolio in 2014 California Public Employees Fund Portfolio N/A The pension system hired UBS AG to help sell fund stakes as Retirement System it seeks to reduce the number of relationships in its portfolio Canada Pension Plan Investment Board Fund Portfolio $1,500 Recently came to market Citigroup Inc. Fund Portfolio $1,200 Bank sold remaining stakes in funds managed by Metalmark Capital to Lexington Partners Diamond Castle Holdings Restructuring/ N/A Goldman Sachs Asset Management and Intermediate Capital Group Stapled Secondary funded a restructuring of the Diamond Castle Partners IV LP in late 2014 Fleming Family & Partners Fund Portfolio $140 Coller Capital purchased the portfolio in early 2015 GE Capital Fund Portfolio $1,300 Ardian purchased the portfolio in 2014 Magnum Capital LPs Restructuring/ N/A In 2014, HarbourVest Partners and five others bought stakes in the Stapled Secondary firm s 2007-vintage fund and pledged fresh capital to its new fund Mizuho Financial Group Fund Portfolio $1,000 Lexington Partners purchased the portfolio in late 2014 Montana Board of Investments Fund Portfolio approx. $126 Pension system disclosed it had sold eight fund stakes but did not reveal the identity of the buyers New Mexico State Fund Portfolio N/A In late 2014, the council said it was considering the sale of stakes Investment Council in 25 funds managed by 15 different GP Pennsylvania Public School Fund Portfolio $1,750 Ardian purchased the portfolio in late 2014 Employees Retirement System State of Wisconsin Investment Board Fund Portfolio $203 In 2014, the board said it was considering the sale of some $203 million in legacy fund stakes Sources: Dow Jones Private Equity Analyst, Dow Jones Private Equity News

17 Guide to the Secondary Market [ 15 ] How Do You Expect Secondary Deal Volume to Trend in the Following Regions? 100% 0 61% 39% United Kingdom 50% 50% Continental Europe 39% 26% 35% Eastern Europe/Russia 70% 30% 8% Japan 46% 54% Asia (Ex. Japan) 74% 26% Australia/ New Zealand 74% 26% Brazil 83% 17% Latin America (Ex. Brazil) 59% 59% 9% 5% 32% 36% Middle East Africa Increase Decrease Stay the Same Source: Guide to the Secondary Market, 2015 edition Partners unit and Landmark Partners, built up large war chests, driving total secondary fundraising to $23.91 billion for the year, up nearly 38% from $17.30 billion a year earlier, according to data provider Dow Jones LP Source, which, like the publisher of this supplement, is owned by Dow Jones. Strong performance generated by private equity has helped create a welcoming environment for those secondary firms pitching new funds. Roughly 70% of respondents to our survey described their most recent fundraising as very easy or fairly easy, with around the same percentage completing their funds in about a year or less. As more large players, including Ardian, Coller Capital and Partners Group, seek capital in 2015, however, some industry professionals have expressed doubts about the ability of firms to buy quality assets at competitive prices. Others argue the amount of capital available to buy secondary stakes is still a fraction of the overall amount of assets available for purchase. There s only two years of buying power held by secondary buyers, said an executive at one large secondary firm. Laura Kreutzer contributed to this report. Raising Your Last Fund Was: 27% 3% 13% 38% 10% Very Easy Fairly Easy 57% 52% Somewhat Difficult Very Difficult Source: Guide to the Secondary Market, 2015 edition

18 [ 16 ] Guide to the Secondary Market Strong Pricing Brings Sellers to the Table, but Will the Market Overheat? their equity by adding debt to their deals or layering it onto their funds. In addition, secondary buyers have more money than ever to spend, thanks to several consecutive years of robust fundraising. In 2014, secondary buyers raised a total of $23.91 billion for new funds, surpassing the $17.30 billion raised a year earlier but falling short of the $26.33 billion record amount raised in 2012, according to Dow Jones LP Source, a data provider that, like this publication, is owned by Dow Jones. At the same time, institutional investors, including pension funds such as the Canada Pension Plan Investment Board and sovereign wealth funds such as the Abu Dhabi Investment Authority, have stepped up their secondary buying activity. The confluence of strong performance, cheap debt and ample capital has helped create one of the strongest seller s markets the secondary industry has ever seen, according to the latest Dow Jones survey of secondary buyers. Among this year s survey respondents, 94% characterized the current market as a seller s market, roughly in line with buyer sentiment in There s nobody that needs to sell, so there s no pressure for transactions to happen, said Brian Mooney, a managing director with intermediary Greenhill Cogent. Buyers have to price to a level where they can convince people to sell. By LAURA KREUTZER Secondary deal volume hit a record level for the second year in a row in 2014 as strong pricing brought more sellers to the negotiating table. And while secondary buyers and intermediaries expect strong pricing will continue to drive deal flow in 2015, many say they will tread carefully. You ve got to be very disciplined and like what you see and, even then, you have to lean into it a little bit, said a senior executive at one large secondary investor. The lack of distressed sellers in the market and competition among buyers for deals has driven pricing to a level that concerns many buyers. Overall, 78% of buyers in our survey feel that pricing is too high in the current market, the highest percentage of buyers that felt that way about pricing in at least the past five years of this survey. How Would You Classify the Current Market? 100% 94% 83% 53% 92% Many of the forces that helped drive pricing and deal volume in 2014 remain in place as 2015 unfolds. Favorable exit conditions, including strong public-market performance, have helped private equity and venture capital funds generate strong returns over the past 12 months. An abundance of cheap debt has also given secondary buyers more firepower and boosted returns on 0 6% 2015 A Buyer s Market 17% 2014 Source: Guide to the Secondary Market, 2015 edition A Seller s Market 47% % 2007

19 WHAT COUNTS IS NOT JUST WHAT YOU DO, BUT HOW YOU DO IT. At Ardian, we strive to deliver quality investment performance from the $50bn of assets we manage or advise for clients. We do this with a relentless focus on generating returns that are durable and sustainable in the long term. The value created and results achieved is shared with our investors, but also our partners, investee companies and their employees. That makes a difference. more information on Excellence. Entrepreneurship. Loyalty. Paris, London, New York, Frankfurt, Zurich, Singapore, Milan, Beijing, Luxembourg, Jersey As of December 2014, Ardian has $50bn of assets under management

20 [ 18 ] Guide to the Secondary Market Secondary Transactions Are Priced: 100% 0 Too High 22% 78% 2015 Too Low As this report was going to press, buyers were pricing assets off of valuations as of either Sept. 30 or 2014 yearend, with the anticipation that March 31 valuations would be higher, according to buyers and intermediaries. When the market turns, then you ll assume that the NAVs will be lower, said Kelly DePonte, a managing director at placement agent Probitas Partners. If you re a secondary player that s investing to make a profit, you ve got to be getting a bit more gun-shy right now. Because of the lack of distressed-driven transactions, sellers have no problem walking away from deals if buyers can t match their price expectations. Among this year s survey respondents, 79% said a seller had walked away from a deal over price concerns, a drop from the 88% of respondents to last year s survey that saw a seller walk away. 29% *Numbers do not add up to 100% due to rounding. Source: Guide to the Secondary Market, 2015 edition 3% 69% 2014* On Average, About Right 55% 45% % Public pension funds were the most likely to walk away from a deal over pricing, with 38% of survey respondents indicating they lost deals from public pensions over pricing, followed closely by endowments and foundations at 35%. Banks and insurance companies were the least likely in our survey to walk away from a deal with secondary buyers over pricing. The public pension plans wanted to test the pricing in the market to see how much they could get from the positions, but they were also loath to take a loss, said Mr. DePonte of Probitas Partners. They weren t necessarily committed. They were price shopping. Secondary buyers in our survey were more likely to pay up for buyout funds than venture funds, keeping with a trend also seen in last year s survey. Among survey respondents, 62% said they paid more on average for buyout funds than they did the previous year, compared with 42% of respondents that paid more on average for venture funds. Both fund types saw a higher percentage of survey respondents pay more this year than those buyers responding to a similar survey last year. Average high bids for buyout funds hit 95% of a fund s underlying net asset value during the second half of 2014, according to a pricing analysis from Greenhill Cogent. That is down slightly from the 100% of NAV that average high bids hit during the first half of 2014 but still below the premiums to NAV that average high bids for buyout funds hit in By contrast, average high bids for venture funds were only 80% of NAV during the second half of 2014, compared with 82% of NAV during the first half. On average, 24% of survey respondents in our survey paid prices for buyout funds that were equal to those funds underlying NAV, compared with only 11% of respondents that paid par for buyout fund interests in last year s survey. Percentage of Sellers That Walked Away Over Pricing, by Seller Type Has a Seller Walked Away From a Deal Over Price Concerns? 100% 100% 21% 12% 14% 65% 77% 77% 73% 62% 73% 79% 88% 86% 0 35% Endowments/ Banks/ Foundations Financial Institutions 23% 23% 27% Insurance Cos. Corporate Pensions 38% Public Pensions 27% 8% Other* 0 Yes 2015 No % 2013 Yes No Source: Guide to the Secondary Market, 2015 edition *Includes family offices, funds of funds, general partners and high-net-worth individuals. Source: Guide to the Secondary Market, 2015 edition

21 Guide to the Secondary Market [ 19 ] Among this year s survey respondents, 11% said they paid prices for venture funds that were equal to or above the underlying NAVs for those funds. By contrast, all of the buyers that responded to a similar survey last year said they paid less than NAV for venture fund stakes. Secondary buyers and intermediaries say improved performance among venture capital funds over the past 18 months, thanks partly to large infusions of capital from late-stage investors and a favorable environment for venture-backed IPOs, has helped lure some buyers back to the space. For the 12 months through Sept. 30, venture funds generated a 24.5% pooled end-to-end net return, outpacing the 18.1% produced by private equity funds over the same period, according to data from consultant Cambridge Associates. Now that prices are higher on the buyout side, you see more secondary buyers try to tap into new markets, so more are looking into venture to stay away from high pricing in the buyout markets, said the head of secondary investments at one global fund of funds. High Prices Lower Return Expectations Stiff competition and high pricing for deals has forced some buyers to lower their future return expectations, although perhaps not as much as buyers did in last year s survey. Among this year s survey respondents, 14% said they expect the internal rate of return of their current fund to be In the Past Year, on Average Did You Pay More for Secondary Deals? 100% 0 Yes 38% 62% 2015 LBO No 45% 56% 2014* *Numbers do not add up to 100% due to rounding. Source: Guide to the Secondary Market, 2015 edition lower than their prior fund, while 86% projected that the IRR would be roughly the same. Among participants in last year s survey, 22% said they anticipated lower returns from their current fund. The average expected return from secondary funds across all survey respondents remains fairly high at 20%, 58% 42% VC 63% 37% PRIVATE EQUITY SMALL MARKET SPECIALISTS Primary Funds of Funds Secondary Funds Customized Private Equity Portfolios Co-Investments BOSTON The Prudential Tower 800 Boylston Street, Suite 1325 Boston, MA T NEW YORK 900 Third Avenue, 27th Floor New York, NY T

22 [ 20 ] Guide to the Secondary Market In the Past Year, Did You Pay Below, Equal or Above NAV for Deals? 100% 0 Below 24% 76% 2015 LBO Equal Source: Guide to the Secondary Market, 2015 edition 4% 11% 7% 2014 Above 2015 compared with a 19% average expected return among buyers who responded to last year s survey. Continued high exit volume, combined with an abundance of cheap debt allowing buyers to enhance the returns on their equity investments, may be boosting more buyers confidence that they can still meet return expectations, even in a pricey market environment. Others, however, are taking steps to adapt to what they expect will be a more challenging return environment going forward. VC 89% 89% 100% 2014 We ve seen leverage at the smaller end of the market not just the 50-to-100 fund portfolios but the five-to-20 fund portfolios, he said. Secondary buyers can employ leverage in several different ways. Some may borrow from a third-party lender to help fund the purchase of a secondary portfolio, much in the way a buyout firm may use debt to help finance the purchase of a portfolio company. The debt helps enhance the return on the secondary buyer s equity investment in a deal, although early cash flows generated by the portfolio often end up servicing the debt before they get distributed back to the secondary fund and its investors. Adding debt to a transaction can also enhance a firm s buying power, allowing it to fund a deal on its own rather than having to split a transaction among multiple buyers, according to intermediaries. Among respondents in this year s survey, 9% said they had employed debt in transactions. Far more of the buyers in our survey, 31%, employed debt at the fund level as a cash management tool. Blackstone Group s Strategic Partners Fund Solutions unit and Lexington Partners both have used debt at the fund level to manage cash flows. Layering debt onto a secondary fund allows a firm to finance early deals outside of a fund s balance sheet so that investors that commit to later closings of a fund don t benefit from early deals at the expense of investors that signed on earlier in the fund s life. Debt facilities at the fund level tend to have lower interest rates than those that are placed on individual portfolios because they are typically perceived as less risky. Net IRR Expected From Future Funds SL Capital Partners, for one, recently lowered the proposed hurdle rate, the return threshold a fund must reach before a sponsoring firm can start pocketing profits from the fund, for its newest secondary pool to 12%, according to a recent report from sister publication Private Equity Analyst. Although 12% is still relatively high, it is modestly lower than the 14% hurdle the firm set on its first secondary fund, a $146 million vehicle closed in % % 20% Debt Goes Mainstream Buyers and intermediaries say more secondary buyers than ever are turning to the debt markets in their quest to maintain high returns in a competitive pricing environment. Leverage is very much a strategic decision at the moment, said Gregg Kantor, who works on the fund finance team at Investec Bank PLC, adding that even secondary firms that haven t previously used leverage have started to educate themselves and their senior partners about its use. There s a mindset shift. 0 17% Mean (%) Median (%) Is This IRR Higher, Lower or the Same as That of Past Funds, on Average? 14% Higher Lower 8% He added that secondary buyers and the limited partners that back them have become more comfortable with the use of leverage in secondary deals and funds, even in smaller transactions. 86% Source: Guide to the Secondary Market, 2015 edition Same

23 Guide to the Secondary Market [ 21 ] The risk the bank is taking is that the [limited partners] do not comply with capital calls, said Pierre-Antoine de Selancy, a managing partner at 17Capital, which raised some 500 million for its third fund in late It s a very different risk from lending to someone for a portfolio and using that portfolio as collateral. But firms that don t use leverage say all this debt could come back to haunt buyers in the event of a market downturn. If the exit market becomes more difficult, you have fewer distributions and your net asset values correct because they re linked to the public markets, said Wouter Moerel, head of secondaries at AlpInvest Partners. Then you could get into covenant issues with your debt. One final form of leverage used in secondary transactions comes in the form of deferred payments or seller financing. Secondary buyers may agree to pay a portion of the portfolio sale up front and defer the remainder of the payment one or even two years later. Doing so often helps buyers bid more for a portfolio when the seller is particularly sensitive to pricing, especially if the buyer expects the portfolio to generate distributions in the near term. Distributions can be used to help fund the deferred portion of the payment for the deal. GPs Flex Their Muscles As more limited partners turn to the secondary market to actively shed certain fund relationships in their portfolios, general partners managing those funds are demanding a greater say over who buys into their funds. Amid stiff competition for deals, some GPs may even demand prospective buyers of their fund stakes pony up additional capital to back a new fund or new investments, often called a stapled secondary transaction. Among this year s survey respondents, 31% backed at least one stapled secondary deal in 2014, including 8% that invested in two or more stapled secondary deals. By contrast, only 16% of those same buyers had backed at least one stapled secondary in The growing popularity of general partner or fund restructurings may also be driving growth of stapled secondary deals, as secondary investors in restructuring How Many Stapled Secondaries Did You Do? 23% 4% 4% In % 4% 12% Source: Guide to the Secondary Market, 2015 edition In More Than Three deals typically provide capital for new deals or a new fund in addition to purchasing stakes in older portfolios. Stapled secondaries can be risky, however, since it is often harder to determine how well the general partner will do with future investments than it is to assess a portfolio of deals the firm has already backed. But so far, it is a risk that many buyers seem willing to take. A More Rational Mindset? Although pricing has remained strong into 2015, buyers and intermediaries say a softening in the U.S. economy or a public market correction could prompt buyers to price bids more conservatively and potentially take some momentum out of the market. One of the reasons pricing is so high is that people anticipate that distributions and values will continue to go up, said Brent Nicklas, managing partner and chief executive of Lexington Partners, which in April wrapped up its eighth fund at its $10.1 billion cap. The moment that changes, you re going to see the bid-ask gap open up. Others, however, say they see little chance of a market correction anytime soon. Financial markets have very short memories, and the only way they move is because there s something big happening, said Mr. Moerel of AlpInvest. Are people going to be become more rational? I think something big needs to happen, and right now there s nothing on the horizon. 84% Do You Use Debt at the Fund Level? Do You Use Debt to Finance Secondary Deals? 9% 69% 31% Yes No 91% Yes No Source: Guide to the Secondary Market, 2015 edition Source: Guide to the Secondary Market, 2015 edition