CIC commits $1.5 billion to secondaries

Upon completion of the agreements, US firm Lexington Partners, Pantheon Ventures, and Goldman Sachs will equally receive $500 million each in special accounts, to be kept separate from their main funds. None of those firms would comment on the matter.

To select the right secondary funds, CIC had meetings with around 30 secondary managers, including Step Stone, Credit Suisse and Parish Capital. However, some of these decided not to take CIC’s capital, because of potential conflicts with existing investors of their custom accounts. Even Coller Capital, the pioneering UK secondaries firm, felt that it could not manage the conflicts, according to founder Jeremy Coller.

Since the economic crisis, alignments between LPs and GPs have become a major issue when investors decide to deploy their capital in funds, and requests or demands for lower fees for GPs is one major argument. CIC is also thought to be concerned to learn as much as it can from its key private equity relationships.

One secondary source told AVCJ, “One would have thought that fees and some IP transfer might be part of those arrangements. Fees are one of the attractions of a separate account. Another is that there’s room for a tailored mandate. We have conversations with people like this quite often.”

In Asia, secondary transactions are not as familiar as the West, but the sector is viewed as due for considerable future growth. CIC has taken a similar path to the Korean Investment Corporation, which has also allotted substantial capital for the secondary market.

According to Lucian Wu, Managing Director and Head of Asia at secondary specialist Paul Capital, “While the secondary market in Asia is still an ‘emerging’ market within an emerging market, there is a lot of room for growth. Globally, secondary deal volume has ranged between $10-20 billion per annum in recent years, with Asia currently still accounting for a relatively small part of it. That said, global secondary deal volume in 2009 was estimated at approximately $10 billion. This was much lower than in previous years, and against expectation, due to the wide bid-ask spread between buyers and sellers, the much lower than expected capital calls, and the overall volatility in the capital markets.”

According to Pantheon Ventures, Asian secondary activity has the potential to double to 10% over time, while some LPs hesitate or are unable to commit capital for the remaining years of their promised commitment, which is usually 10 years. With the current economic climate, and impacted portfolio values, many LPs are said be looking at selling their holdings in private equity funds. The number of deals is increasing, another secondary specialist noted to AVCJ.

“With the return to stability of the capital markets, meaningful exits coming through, and more capital calls expected from GPs, we expect to see a much higher volume of secondary trade coming through in 2010 and beyond,” Wu continued. “Another important factor that is expected to drive further growth in the secondary market is that banks are expected to continue their selldown of private equity assets on their balance sheets, estimated at over $100 billion, over the next few years.”

As for the balance of power and rights between different investors in a fund, David Rubenstein, founder of the Carlyle Group, publicly noted that the era of big public pension funds and sovereign wealth funds accepting the same terms as smaller investors is over.

According to a Coller Capital report, 92% of LPs now cite the need for liquidity as a reason to sell in the secondaries market, compared with 27% in 2007, while 82% now identify the need to re-balance private equity portfolios, compared with just 39% in 2007.

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• Topics
• Funds
• Secondaries
• Fundraising
• Greater China
• Goldman Sachs
• Coller Capital
• Jeremy Coller
• Lucian Wu
• Pantheon
• Paul Capital Partners
• CIC
• Lexington Partners