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The private equity secondaries market is full of opportunities during times of volatility.

At Treble Peak, we are continuously scouring the market for leading and relevant private markets funds.  Creating diversification is the key, but understanding macro trends and opportunities to complement market movements is the winning formula.

This month saw UK Pension Schemes hit the front pages, with headlines citing a “crisis”, markets “going into meltdown”, and UK schemes “risking being wiped out”.  For many years, the stability of a defined benefit pension scheme has been managed using swap derivatives (Liability Driven Investments or LDIs).  In simple terms, when interest rates fall (causing liabilities to increase) the swaps pay out to the scheme, and when they rise (causing liabilities to fall) the scheme pays to the swap provider.

The ‘headline’ issue faced by the hedged pension schemes was the unexpected sudden rise of interest rates, driven mainly by the UK ‘mini’ budget announcement.  Hedged pension schemes hold pools of cash and gilts to cover interest rate hikes, but the magnitude and speed of the movement caught many such schemes out and forced them to sell other assets such as corporate bonds, or even in some cases seek to dispose of less liquid assets quickly.

These less liquid assets are being sold at a discount and many in the market who are sitting on dry powder are sensing an opportunity.  Goldman Sachs is one firm to notably sense a chance to buy. “We’re seeing discounts of 20 to 30 per cent for a high quality portfolio of stakes in private equity funds,” said Gabriel Möllerberg of Goldman Sachs Asset Management. “It’s absolutely an opportunity.”

Francesco di Valmarana, a partner at Pantheon, which specialises in buying investments in private equity and credit funds from other investors, said: “Turmoil generally drives activity in the secondary market.”

So what is private equity secondaries? – It is worth pointing out the difference between LP-led and GP-led secondary transactions.  The classic approach is typically a LP-led trade whereby the transfer of interest of a single LP is executed so the buyer assumes the interest in the fund and all the future capital calls and commitments.  GP-led transactions differ.  In its most basic form, a GP-led secondary involves existing LPs being given the option to sell all or a portion of their fund interests to the buyer during a binding election period.  The fund continues with the buyer as a replacement LP.

At Treble Peak, we have been following the rise of the secondaries market closely and this market event further emphasises the opportunities out there, if and only if, a firm is well positioned with enough dry powder to act quickly.  We are working with one PE manager about to complete their second close of their £500 million fund five.  It focuses on GP-led secondary direct and independent sponsor transactions.  They are perfectly positioned and have the right expertise to take advantage.  If you would like to learn more about this fund, you can download the investor deck from the Treble Peak platform after you have set-up your account. Additionally, please feel free to contact us directly with any questions.

Finally, it should be noted that the pension scheme liquidity issue is real but likely manageable in the long-term and with the help of the ECB stepping in, most pension schemes will likely be in either the same or even better funding position than they were before the significant volatility of the past couple of weeks.  This was further emphasised today with Kwarteng’s forced resignation announcement.  British government bonds have rallied, sending yields down by over a quarter of a percentage, while sterling parred losses against the dollar.

The activities and actions of the last couple of weeks however, further emphasise that with market volatility comes opportunity.  The key is to back the funds who are in a position to act quickly.

This short article complements a previous article that highlights the opportunities in Private Markets during a recession.  To read this please click here…

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