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
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
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.