Secondary Market: Evolution and Recent Trends Emmanuel Roubinowitz, Ponte Partners Internet Securities Event March 16, 2016 1 ¡
Secondary Overview Cash flows • Acquisition of shares in PE/VC funds or PE/VC backed companies • Average fund life is 14.2 years so some investors will need to sell Years • 5 to 10% of the primary market • $35 billion market in 2015 • Started in the 90’s Early Tail end Mid • Originally distressed sellers, now many different types of sellers • These trends should continue Source: Preqin, J-Curve is a hypothetical representation of fund cash flows 2 C O N F I D E N T I A L
Secondary Segments LP Interests Transaction Type: Acquisition of LP interests in funds LPs Sellers: Endowments, family offices, foundations, insurance companies, public pension funds etc. Portfolio Directs Transaction Type: Acquisition of securities in a PE/VC Fund group of companies Sellers: Corporates, funds (end of life) etc. Company Directs Transaction Type: Acquisition of securities in one Portfolio Portfolio Portfolio Portfolio company Company Company Company Company 1 2 … N 2 Sellers: employees, angel investors 3 C O N F I D E N T I A L
Sellers’ objectives Rationale Examples An estate sells an interest in a fund in the context of a Estate management succession The new CEO of a corporation decides to liquidate a portfolio Change of strategy of interests in smaller companies An employee of a technology company sells some of her/his Liquidity shares to buy a house A public pension fund needs to reduce the amount invested in Reduction of PE investment PE following decrease of other assets (denominator effect) An endowment reduces the number of its GPs from 200 to 150 Portfolio management to cut monitoring costs Following Basel III, a European bank has the obligation to sell Regulations all PE assets 4 C O N F I D E N T I A L
Secondary Growth Secondary Market Transaction Volumes 2003 - 2014 $35.1 $40.0 Transaction Volume (In Billions) $35.0 $5.2 $30.0 $1.1 $25.0 $1.6 $6.6 $20.0 $2.7 $2.7 $15.0 $30.0 $1.9 $23.2 $24.8 $7.0 $10.0 $0.6 $2.4 $18.2 $16.7 $1.4 $0.7 $0.4 $11.4 $13.7 $5.0 $8.6 $7.9 $6.7 $7.0 $6.7 $- 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LP Direct • Growth of underlying PE market • Secondary as a % of primary increased too, from ~2% in the early days to 90’s to 6% today • Sellers are comfortable with the process Source: Dow Jones Private Equty 5 C O N F I D E N T I A L
Secondary Performance • Lower variance across managers • Downside protection • Higher IRR 6 C O N F I D E N T I A L
Secondary pricing Factors influencing pricing Buyout pricing as % of NAV 109% ¡ Asset based 96% ¡ 95% ¡ • Perceived GP quality 91% ¡ 89% ¡ 86% ¡ 84% ¡ • Asset risks • Maturity 73% ¡ • Valuation style 59% ¡ Market based 2007 ¡ 2008 ¡ 2009 ¡ 2010 ¡ 2011 ¡ 2012 ¡ 2013 ¡ 2014 ¡ 2015 ¡(H1) ¡ • Market sentiment • Supply and demand VC pricing as % of NAV 103% ¡ 82% ¡ 81% ¡ 79% ¡ 74% ¡ 73% ¡ 70% ¡ 68% ¡ 63% ¡ 2007 ¡ 2008 ¡ 2009 ¡ 2010 ¡ 2011 ¡ 2012 ¡ 2013 ¡ 2014 ¡ 2015 ¡(H1) ¡ Source: Cogent Greenhill 7 C O N F I D E N T I A L
How to calculate a secondary price Analyze Prepare Set target Calculate Negotiate companies forecasts multiple (risk) Price Example • LP selling an interest in a fund with a value of $5m (4 companies) Price + Past Distributions Seller’s • Buyer expects them to be sold for $7m over 3 = Amount Invested Outcome years Ø For a target secondary multiple 1.6x, buyer will offer a price price of $4.38m, i.e. discount 12.5%. Ø If projections of $8m, no discount 8 C O N F I D E N T I A L
Technology secondaries: recent trends Private investment in technology companies has reached the size of public market • Private investment in VC/PE amount is more than $1 trillion • Total valuation of Unicorns amounts to $525bn (NASDAQ market cap $7.5 trillion) Original investor base (institutions) is now including more and more individuals • High net worth individuals • Employees • Angels Endowments But investors’ liquidity options remain limited Corporates Employees, Individuals 0 20 years 9 C O N F I D E N T I A L
Technology: growing inventory of companies 9,000 • Number of exits ~10% of total 8042 8,000 Number of VC Backed Companies companies vs. Exits 7,000 • The rest disappears or remains in “inventory”, waiting for 6,000 liquidity events 5,000 4595 4361 4230 4238 4199 4039 3964 3890 4,000 3667 3300 3217 3236 3173 3036 3,000 2,000 1,000 617 578 574 549 543 526 483 504 466 422 423 388 392 350 364 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Number of VC backed deals Exits (M&A - IPO) Source: NVCA 10 C O N F I D E N T I A L
Conclusion: what to expect? • Volume of secondary sales will continue to grow • Institutional investors are starting to sell: Intel Corp., one of the world’s largest makers of computer components, is planning to sell part of its venture capital unit, assets that could be worth as much as $1 billion, said people familiar with the matter. Bloomberg, March 11 2016 • Large amount of sales from individual investors • Interesting buying opportunities • Regulations may appear 11 C O N F I D E N T I A L
4 Embarcadero Center, Suite 1400 San Francisco, CA (415) 926-7770 Ghia Griarte Emmanuel Roubinowitz ghia@pontepartners.com emmanuel@pontepartners.com The information contained in this document is provided for general information and discussion purpose only. It has not been prepared for any other purpose and is not contractual. This document is not intended to make any offer, inducement, invitation or commitment to subscribe to Ponte. 12 C O N F I D E N T I A L
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