Secondaries for beginners

The secondaries market is still dominated by big players and big deals. But as interest in this historically opaque but rapidly expanding area increases, smaller, atypical investors are trying to gain access.  Enter: secondary platforms.

These platforms, many of which operate as exchanges or matching services, provide a mechanism to trade smaller alternative assets. And they’re growing in popularity. Take Secondcap: since its April launch, the US outfit has seen around $110 million in assets traded through its platform, as of 22 July, and it expects that figure to grow in the coming months.

Regulation is a key driver here. “As the pressure of Dodd-Frank starts to hit the smaller banks, selling will escalate. With in-house staff, they can easily engage our secondary platform,” said SecondCap managing director Patrick Shattenkirk. “Initially, we’re focusing on transactions that are not on advisors’ radar screens. As the platform gains acceptance, we expect to see bigger deal sizes.”

On 18 October, US regulators will issue rules dictating how banks can invest in private equity holdings, in order to comply with the Volcker rule. Activity could also be driven by current pricing levels, which have risen over time to favour sellers, sources said. 

“Everyone at the capital table has realised that secondary liquidity is available and acceptable,” Millennium Venture Technology managing director Sam Scherwin said.  “At the same time, you’re starting to see institutional investors selling, but not from distressed positions.”  Indeed, global placement agent Triago believes the secondary market will grow to a record $25 billion this year.

Other exchanges are also benefiting from this general enthusiasm. In 2009, alternative asset exchange Second Market saw approximately $100 million of trades on its platform. It beat that total in the first quarter of 2011 alone, with deal volumes of around $157 million.

Swiss exchange DealMarket, which chief executive officer and co-founder Celine Fillistorf refers to as the Yellow Pages of private equity, has also generated significant interest since launching in March. As of 22 July, the site had 656 deals posted, ranging from advisory services to secondary investments.

It’s still tough to sell big portfolios on an exchange. But it’s easier to move smaller assets like private shares and venture capital stakes, in a market that is becoming more transparent and efficient, according to Neil Campbell, the head of alternative investments for Tullet Prebon.

Many traditional inter-broker dealers and placement agents remain skeptical of these platforms, however. Several of those interviewed by PEI raised concerns about the possible dissemination of confidential information, as well as the inherent risks of trading with family offices and individuals that are new to the secondary market.

“There are all kinds of complexities you have to deal with; and if you had to do that every time you traded stock, the market would come to a grinding halt,” said David de Weese, Paul Capital’s head of global secondary transaction sourcing activities . “The first time there’s a scandal, the [US Securities and Exchange Commission] will come down hard. That kind of trading opens itself up to fraud.”

While many exchanges vet new entrants onto their platforms, others like DealMarket do not, citing liability concerns. This lack of due diligence, and the subsequent transfer of risk, could unnerve general partners, who may not have the opportunity to properly vet new limited partners. Furthermore, many of these transactions rely on an exchange of information that most GPs would not want to see on a competitive trading platform. 

“There’s still some sensitivity on the side of GPs, in terms of the confidentiality of the info,” Triago managing partner Jean-Marc Cuvilly said. “There’s still a feeling that these processes should be discreet and really only for accredited investors.” Unless these exchanges can address this issue, deal sizes are likely to remain small.