Secondaries used for venture capital and private equity limited partnership interest of the original investors in the market, because the original investors in the limited partnership intends to invest cash prior to the termination. The original variety of reasons investors may want to sell their shares held by private equity firms, such as the need for cash, change the investment strategy or focus, or need to re-balance the portfolio and so on. For investors, concerned about the sub-unit of the main advantages is that they do not have to as long as the IPO investors to invest in private equity funds.
Secondaries –offering investors less risky private equity exposure Old Mutual Private Equity is hard at work popularizing the secondary market in private equity in South Africa among institutional investors interested in gaining access to less-risky private equity assets. “We’re proud to report that our OMIGSA Private Equity Fund II, of which we’re currently offering a portion as a secondary investment to institutional investors, provides exposure to three of South Africa’s top four private equity deals by value for 2008 –Alstom, Idwala and Tourvest,” says Mark Gevers, head of private equity at Old Mutual Private Equity. “These recent transactions give the Fund a youthful profile, but we expect that, combined with the more mature investments in the Fund, over the medium term the aggregate secondary portfolio will generate returns in line with our older portfolios of private equity assets. These have collectively returned over 30% per year (excluding fees) since we first started making investments in 2001.” Some South African investors may not have heard of the term “secondaries” in connection with private equity, but as Gevers explains, the secondaries market involves transactions in which investors sell their existing investments (or fund exposures) in private equity funds to other investors. “Although the private equity secondary market began in the US in the early 1980s and was valued at over US$20bn by 2008, in South Africa there are only a handful of private equity managers, like ourselves, who have been quietly active in the secondaries market in recent years,” Gevers says. “We have facilitated several secondary transactions for clients by selling investments into our existing multi- manager private equity funds. These secondary investments have been key contributors to the two multi-manger private equity funds’ outperformance of listed equity market since their inception.” Gevers says there are several benefits the secondaries market can offer private equity investors compared to the more mainstream primary market, where investors place their money in newly launched funds, which then must seek attractive (but as-yet-undetermined) private equity opportunities. Of all the benefits, perhaps the most important is generally lower and more quantifiable risk. “Secondary funds are typically less risky than the original private equity funds because you are buying into an existing private equity fund that is several years old and will generally already have many underlying investments that are a few years into their investment cycle,” notes Gevers. Because of this, the following risks are mitigated: Usually all the underlying deals in the portfolio will have already been finalised, which enables the investor to fully assess the entire portfolio and gain a clear picture of the future prospects of each company that makes up the fund; Relationships between the main role players in the investments are bedded down (shareholders, management, debt providers, private equity partners); The investment time horizon is shorter, which means distributions will begin to be paid out sooner than on a primary private equity investment; Strategic action plans for the portfolio companies have been defined and implementation is well underway; Companies will typically have begun to pay off the debt associated with the private equity deal, which means lower debt (gearing) levels and therefore less risk; and The prospective investment returns are less risky, as the underlying companies in the portfolio are part way through their investment cycle. Secondary investors avoid the early part of the typical “J-curve” experience of returns over time, because costs are lower in later years and business operations are well-established, which allows a clearer forecasting of returns. The OMIGSA Private Equity Fund II, says Gevers, is an excellent example of a premium private equity portfolio that offers lower risk, sold as a secondary offering. Built up by the expert Old Mutual Private Equity team over several years, it comprises a diversified portfolio of nine companies in several different industries, including healthcare, mining, manufacturing, tourism, energy and banking. The first investment was made in October 2005 and the final investment in December 2008. Investors have unique exposure to established premier companies like Alstom, Consol, Idwala, Life Healthcare, Shanduka Group and Tourvest, most of which are market leaders in their industries. ENDS
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