Lecture Notes on Private Equity from the Perspective of Limited Partners

Introduction

• Anan apologized for absence due to visa issues in Dubai.
• Presenter is a partner at Triago, based in New York.
• Focus of the session: understanding private equity from the perspective of limited partners (LPs).

Overview of Triago

• Founded in 1992 to raise capital for European General Partners (GPs).
• Expanded to New York and other regions (Asia, Middle East) to connect GPs with institutional investors.
• Established a secondary practice in 1999 to assist LPs with liquidity options.
• Current client focus: middle-market firms raising between $500 million to $3 billion in various sectors (buyout, venture, real estate, mezzanine, energy).

Case Study: Endowment and Foundation

• Participants will role-play as private equity portfolio managers at endowments and foundations.
• Case study examines a fictional endowment facing a denominator effect (overexposure to private equity).
• Portfolio manager exploring options for reducing private equity share.

Key Issues Identified

1. Denominator Effect: Private equity's share of the portfolio is larger than desired.
2. Market Conditions: Initial reluctance to sell due to better prices a few years ago.
3. Secondary Transactions: Concerns about potentially disadvantageous pricing.

Trustee Considerations for Secondary Sales

• Price Concerns: Expected discount from NAV and overall market conditions.
• Transaction Timing: Secondary transactions are complex and time-consuming.
• Confidentiality Issues: Impact on the reputation and future relationships with GPs.
• Market Dynamics: What if a rush of sales floods the market?

Options for Portfolio Sale

1. Direct Auction: Invite multiple buyers for competitive pricing.
   • Pros: Potentially higher prices.
   • Cons: Confidentiality risks.
2. One-on-One Negotiation: Approach a single buyer.
   • Pros: Maintains confidentiality.
   • Cons: Risk of not achieving the best price.
3. GP Approach: Discuss transfer options with GPs directly.
   • Pros: May facilitate smoother transactions.
   • Cons: GPs may not prioritize sellers' interests.
4. Using an Agent: Engage a third-party advisor to facilitate the sale.
   • Pros: Better pricing and confidentiality.
   • Cons: Fees and potential conflicts of interest.

Buyer Perspective in Secondary Market

• Types of Buyers:
  • Funds of Funds: Buying secondaries for better liquidity and to avoid J-curve effects.
  • Dedicated Secondary Funds: Focus on mature assets for quicker distributions.
  • Opportunistic Buyers: Other endowments and foundations looking for strategic opportunities.

Portfolio Analysis

• Classifying Assets: Group funds into categories (e.g., venture vs. buyout).
• Valuation Considerations: NAV valuation methods (DCF, comparables).
• Market Pricing Dynamics: Inefficiencies and wide pricing differentials in secondary transactions.

Closing and Transfer Process

• Typical Timeline: 10 to 14 weeks from start to finish.
  • Preparation, auction rounds, buyer due diligence, GP consent required.
• Handling Rights of First Refusal: Strategies to navigate potential complications in the transfer process.

Market Outlook and Future Considerations

• Efficiency of Secondary Market: Likely to remain negotiated due to GP control.
• Long-term Predictions: Uncertain, but the balance of buyers and sellers will affect pricing dynamics.
• Impact of Regulatory Changes: Potential for tighter regulations on placement agents and secondary transactions.

Conclusion

• Importance of understanding both LP and GP perspectives in private equity.
• Comprehensive analysis of the market, pricing, and strategic approaches essential for success in secondary transactions.