An expanding segment

Jochen Mende, Head of Transactions, reveals key trends in private equity and explains how investors can take advantage of them.

The secondary private equity market is showing increasing dynamism, especially in the current market context. Jochen Mende, Head of Transactions at UBS Asset Management Multi-Managers Private Equity, reveals key trends and explains how investors can take advantage of them.

1. Why invest in private equity?

Private equity gives investors access to unlisted companies. It also represents an important access to capital for start-ups with intense financing needs, as well as for companies looking for capital to finance growth or an acquisition. The activist nature of private equity often allows fund managers to exert considerable influence over the underlying investments. In this way, investors benefit not only from exposure to otherwise unaffordable private companies, but also from the special ability of fund managers to increase a company’s value over the long term. Investor capital is generally invested in closed-end funds with a specific strategy (for example, focusing on buyouts in certain sectors), and with a fixed duration of ten years or more. This framework allows private equity fund managers (or general partners, GPs) to pursue long-term value creation strategies, but it also has some drawbacks.

How can secondary market investments overcome some of the challenges of private equity?

Private equity funds do not have a predefined settlement mechanism for investors (or limited partners, LP). Thus, if the LP’s financial situation changes during the life of the fund, there is no defined exit route for the investor. And that’s where the secondary market comes in: the acquirer of a secondary fund provides liquidity to investors in private equity funds who want to sell their positions, not having the time or desire to hold their investments until their original maturity.

In recent years, we have also seen that fund managers (i.e. GPs) are also increasingly turning to secondary market solutions to overcome some of the weaknesses of traditional closed-end funds (e.g. in terms of time, capital and value). ).

2. Can you tell us about the benefits of secondary funds for investors?

Access to secondary markets allows investors to build a diversified private equity portfolio relatively quickly, thus minimizing the initial period of negative returns (J-curve), which is a particular feature of this asset class. Additionally, some risks associated with other styles of private equity investing, such as blind pool risk, are less pronounced as secondary market buyers can value existing underlyings and adjust their purchase price to take into account the current trend. of investments.

However, transaction times have shortened considerably and competition for quality investments is fierce, especially for large transactions. From our point of view, the small transaction segment is the most neglected and offers the best opportunities as the secondary market increasingly attracts investors who want to deploy large volumes.

While GP managed transactions allow for a more focused approach to building portfolios, investors need to be aware of their complex, time-consuming and resource intensive nature.

3. How do you ensure liquidity as part of your secondary market strategy?

With nearly $12 billion invested and committed across multiple tenures, UBS AM’s Multi-Managers Private Equity (MMPE) team has one of Switzerland’s longest and broadest track records, dating back to 2000. .

Based on this experience, we developed a private equity product dedicated to the secondary market based on a structure called “evergreen”, which we designed “fully paid-in”, open and semi-liquid, and which allows investors to subscribe and sell units each quarter, for very low minimum investment amounts.

We believe that semi-liquid and open-ended investment solutions work best when interacting with asset classes that have a relatively regular and stable level of liquidity. This is the case for secondary transactions that, in the past, were stable and robust enough to generate liquidity over market cycles.

However, we have implemented a number of safeguards to ensure that our semi-liquid solutions can settle investor redemptions under normal market conditions: first, we limit withdrawals to 5% of stock equity per quarter and per share tranche in order to guarantee equal treatment of all investors, regardless of their size. To fund redemption requests, we coordinate subscription and redemption schedules, seeking to match them as closely as possible. The fund may also use the income generated by the portfolio to fund investor redemptions. This means that the strategy will always have significant liquidity on its balance sheet, estimated at at least 10% of its net asset value. We also have the option of using the portfolio as collateral for a line of credit that will be available to fund the strategy’s operation, including redemptions. Finally, we plan to actively manage the portfolio and, if necessary, sell certain assets on the secondary market on a case-by-case basis. However, investors should keep in mind that this is a semi-liquid strategy and there is no guarantee that they will be able to redeem all of their shares at any time and in any context.

4. What are the success factors for investing in the secondary market?

While it is relatively easy to generate business flows, given the increasing intermediation and professionalization of the market, developing an autonomous and off-exchange business flow requires a lot of work. Understanding the strengths and weaknesses of each GP and measuring the quality of the underlyings, as well as, of course, the valuations implicit in asset purchases are some of the key factors for successful secondary market investments. It is also important to understand the dynamics of the transaction and the motivations of the parties involved. Having a well-established, active and growing primary investment platform is a great asset, not only to be considered by GPs as a reliable long-term partner, but also to have access to information that allows you to act quickly and knowledgeably.

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