This is a great article about the emergence of secondary markets in the private equity world. Keep reading the full article from Ryan Caldbeck, CEO of Circleup.com one of our favorite equity based start-up platforms.
When you invest in a private equity fund or make an angel investment, you are told in big bold letters that this is an illiquid investment and you should not expect to touch that money again for at least 5 to 10 years.
Now that may be changing. A number of factors in the private equity world — including a hot IPO market and investors’ growing appetite for private equity — have converged to create early exit opportunities for private equity investors.
Recently there has been a rise in secondaries — sales of existing interests in private equity funds by wealthy investors, pension funds, and endowments before those PE funds have sold all their investments.
Secondaries attracted attention in April, when private equity fund Ardian announced it had raised $10 billion for a fund of funds that will invest primarily in secondaries. Ardian claims the raise is the largest ever for a fund of funds focused on secondaries and demonstrates the promising outlook for the category. In announcing the new fund, Benoit Verbrugghe, managing partner and head of Ardian USA, said, “A vibrant secondaries market is hugely important for the investment industry as it offers much needed liquidity.”
That added liquidity should be of interest to anyone investing in private equity, including angel investors. Don’t get me wrong; when you invest in a private equity fund or as an angel investor , you should still be prepared to keep that money in place for 5 to10 years. But, I believe as more money flows in the private investments in the future, the opportunities for secondaries will increase in all sectors, including in the consumer/retail space.
And now, KKR & Co. is in discussions with Nasdaq to create a secondary market to allow pension funds and wealthy investors to sell small portions of their stakes in KKR buyout funds to accredited investors. Other PE firms are interested in the proposed market, which would let existing investors cash out of funds earlier than usual.
Blackstone Group LP, for example, has been growing its secondaries business since last summer when it acquired Strategic Partners, a secondary funds manager, from Credit Suisse Group AP. Blackstone President Tony “Hamilton” James has said the business is “more bond-like” because it buys into private-equity funds when deal profits are being distributed. At the same time, he says, returns are usually much higher than fixed-income investments, generally falling in line with typical private-equity investments, at around 17% annually after fees.The rise in secondaries will have an impact on angel investors and potentially allow them to shorten the duration of their investments. As this unfolds over time, more investors may become comfortable making initial investments because of the increased chances for liquidity through secondaries. This won’t happen right away, but certainly in coming years we may see more of these types of opportunities.
What this rise in secondaries means for angel and private equity investors in the consumer space only time will tell. Today, the most common exit in consumer goods is a strategic acquisition by a larger consumer goods company. Large consumer goods companies have war chests for strategic deals to extend product lines or expand geographically. This year, for example, we’ve seen Hillshire Brands Company acquire Van’s Natural Foods, and Zurich-based Aryzta A.G. extend its North American presence through deals for Canada’s Pineridge Bakery and U.S.-based Cloverhill Bakery. The second most common exits are acquisitions by private equity firms, which love the stability and steady cash flow of consumer and retail businesses. The third most common exit is distributions, according to data from the Kauffman Foundation’s Angel Investor Performance Project.
However, this trend is especially noteworthy because of the increasing ease of access to private opportunities through online marketplaces overall. With sites like ours for accredited investor crowdfunding providing increased transparency and access to enter investments, and a rising secondary market to potentially find liquidity earlier for investors, both ends of the private market are changing dramatically. Private equity remains a high risk and illiquid asset class suitable only for some investors. However, it is likely private capital markets will look very different by the end of the decade than they do today, creating a lot of opportunities for investors along the way.