The drastic increase in interest rates of 2022 put pressure on many balance sheets across the investment universe. Against that backdrop, many institutional investors and pension funds elected to sell their stakes, unleashing a torrent of secondary shares. With rates remaining high and uncertainty still rampant, Sabourin expects that dynamic to reverberate well into 2023.
To unload their shares and get cash quickly, he explains, sellers like SVB will have to offer fire-sale prices. And since it’s not the fund itself that’s distressed, but the unitholder, the shares would still be attractively priced relative to what’s being offered on the market.
“Even when things are going well, there’s always someone somewhere who needs to sell for any given reason – a new mandate, or a liquidation,” he says. “These days, it’s been about adjusting asset allocations within the portfolio because equities tanked and private equity expanded. Some allocators may also want to sell their existing PE fund shares to buy shares of a new fund.”
For those looking to snap up secondaries, Sabourin says, due diligence is key. Having a process in place and being knowledgeable about the sector in question is crucial, as well as doing your homework on sellers to make sure deals don’t fall through. Because the private-markets space can be treacherous for the uninitiated, he says it’s important to partner up with an experienced person, team, or firm who knows what questions to ask.
The lifespan of a private equity fund tends to be in the neighbourhood of 10 to 12 years, Sabourin says, with a performance profile that follows a J-curve: an initial period of negative returns followed by the potential for a sharp takeoff later on. Those looking to avoid the initial negative-return phase of a private equity fund, therefore, will want to buy secondary shares of funds in their seventh year.
