GLOBAL - The secondary private equity market could parallel the buy out bubble of 2007, one consultant warned.
Watson Wyatt warned investors that enough distressed sellers haven't come to market to allow buyers to dictate favourable terms yet.
Watson Wyatt senior investment consultant Mark Calnan said: "We remain relatively cautious about investing in secondaries. Many potential sellers have not yet experienced sufficient liquidity problems to be considered ‘distressed sellers'. As such, they are opting to hold on to their positions rather than sell at a deep discount on the secondary market.
"In addition, there are many new buyers, enticed by potential attractive returns, adding to overall demand. The combination of these factors has effectively reduced a perceived supply-demand mismatch between buyers and sellers, which secondary managers and intermediaries have been advertising for some time."
Another con is the high fees, Calnan said. Watson Wyatt research found that fees typically include carried interest of between 10% and 20% of the total profits, and a 1% to 1.5% management fee, on top of the fees charged by the underlying manager.
Chicago Policemen's Annuity and Pension Board investment officer Samuel Kunz said the high fees are one of the reasons the scheme has not carved out a secondary private equity mandate.
But other scheme officials have found good deals. San Francisco City and County Employees' Retirement System deputy director for investments David Kushner told Global Pensions he's been taking advantage of activity in the secondary market.
"Everybody was pulling in saying, ‘We have to go to cash, sell private equity in secondary, sell our real estate holdings.' We saw that as an opportunity. We told our general partners we were ready purchasers of secondary positions," said Kushner. (Global Pensions, October 1, 2009)
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Defined benefit (DB) schemes could have an aggregate surplus by 2021 under Pension Protection Fund (PPF) projections, its strategic plan for 2018 to 2021 reveals.
Investment consultants are failing to recommend products that outperform net of fees, the Competition and Markets Authority (CMA) has said as its investigation into the market continues.
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