The secondary network: Online platforms

It is almost impossible to get an accurate picture of activity levels in the traditional private equity secondaries space. Few disclosure requirements and a lack of publicly available data means that LP interests are often traded under the radar.

The information that is available tends to come from intermediaries who broker the transactions. However, even they are restricted to what they know about their clients.

One way the industry has sought to provide a better sense of what is going on - and therefore a sense of market liquidity - has been through online platforms where information on funds and deals can be traded directly between players.

Setter Capital, a Canada-based secondaries advisor, is behind the latest offering known as Secondary Link. It serves both as a platform for people in the industry to connect with each other and as means of gauging GP performance and fund liquidity.

While the site - which is being offered for free - clearly has its uses, it is unclear how much demand there is for the service and from whom, and by extension what impact it might be able to have on liquidity in the secondary market.

"Prior to the platform being set up, I can't say anyone ever said they needed it, most likely because they didn't know they needed it," says Peter McGrath, managing director at Setter.

He explains that the idea to set up Secondary Link was largely a reaction to the rapid growth of the secondaries market. Today the firm covers over 1,000 buyers of LP interests in funds who are active across several alternative asset classes, including private equity, real estate, infrastructure and hedge funds. This compares to around 250 four years ago.

"We just saw the market exploding and we had a theory that PE and other alternative funds were not nearly as illiquid as people have perceived them to be in the past," McGrath says.

Liquid or not

As such, the core feature of the platform is the liquidity rankings of the funds it features - of which there are 4,000. While private equity is generally less illiquid than it was in its early years, the degree of liquidity varies greatly from fund to fund: Brand names like KKR or The Carlyle Group might be almost as liquid as a block of a listed equity, but a lesser known Asian manager may arouse little or no buyer interest.

The liquidity ranking classifies funds as excellent, very good, and good, based on Setter's in-house data on the number of buyers a fund family has. Fund families are further ranked by the number of followers they have on the platform and by the number of buyers who have registered their interest.

The platform acts as a closed social network for secondary market participants, similar to professional network LinkedIn where users are able to join and connect with each other and as well as follow the funds there interested in.

Despite the platform drawing around 700 registered users since its launch, not all are convinced of its practical applications. For example, larger transactions - involving multiple LP interests - are unlikely to be brokered through an online platform due to their sheer complexity. Meanwhile, the platform may not be of interest to those investors, such as a fund-of-funds, who rely on asymmetry of information for an advantage in market.

"The LPs give them money so they can go out and source interests on a proprietary basis," says one secondaries investor. "Once LPs can go direct and source a piece of a fund they will no longer want the middle man, the fund-of-funds will become disintermediated."

On the other hand, there is the view that online platforms may be more useful for smaller-sized LP interests. Jason Sambanju, managing director at Paul Capital, makes the point that liquidity is harder to come by where smaller interests are concerned as it is not a space where many professional secondary investors - such as Paul Capital - operate.

"I can see how investors with small stakes and very few options may use these kinds of platforms," he says. "If they provide some sort for liquidity solution for these small LP interests I can see how it is adding to the industry to have such platforms come in."

Misperceptions

The flipside of this is that the platform might add to the impression that private equity is more liquid than it actually is. As one industry participant points out, buyers who are interested in buying small interests may not be attuned to the fact that once you buy into a private equity fund you are committed.

Despite these misgivings, the platform is still being put to use. According to Setter, Secondary Link members have collectively more than 3,000 funds on their shortlists. They have also expressed a willingness to collaborate on due diligence on 1,135 funds with fellow members while listing themselves a potential buyers for 1,350 funds.

How much impact Secondary Link will have in long run, however, is entirely dependent on it gaining traction. After all, platforms such as these are only as good as the number of people that use them.

"I can see these platforms becoming more significant contributors to the liquidity in the market but I couldn't say by how much," says Sambanju.."Sizing the secondary private equity market is always more of an art than a science because there are no public disclosure requirements when you transfer LP interests, so there is no real depository of information."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Secondaries
• Secondaries
• Secondaries
• USA
• Asia