A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

INDUSTRY OVERVIEW

The secondary market dates back to the global economic crisis of the early 1990s, which resulted in a lack of liquidity at many financial and corporate institutions, especially those with illiquid assets such as private equity. Since its emergence, the secondary market has been alternating between downward cycle and upward cycle 9 , gaining more maturity during each new period of economic turmoil. However, despite a great deal of interest and a large number of investors looking at the possibility of selling private equity portfolios, transaction volumes did not meet expectations and remained relatively low throughout 2009 10 , with a transaction volume reaching only $5 billion in the first half of 2009. Figure 7 shows the evolution of the global private equity secondary market since 2003, in terms of transactions and fund raising.

Figure 7: Global private equity secondary market (2003 - H1 2009)

21

18.0

18

16.2

15.6

15.0

15

12

10.0 10.7

9.0

In $bn

9

7.4

7.0

6.7 6.3

6

5.0

5.0

3.1

3

0

2003

2004

2005

2006

2007

2008

H1 2009

Transactions

Fund raising

Source: Cogent Partners, 2008 & Dow Jones private equity analyst, 2009

1.1.4

Comparison between private equity funds and traditional funds

Private equity funds differ from other types of investment funds. Indeed, private equity fund managers generally seek to control the businesses they invest in and choose an optimum capital structure for their investee companies. Thus, private equity funds operate with much better information, stronger controls and influence over management than traditional funds. Besides, investors in private equity funds are generally well-informed investors, i.e. profes- sionals capable of making independent investment decisions and understanding the risks related to those decisions. They typically commit to a 10-year investment in each fund. Com- pared to many other investment fund types, this is a long-term commitment and private eq- uity is basically an illiquid market.

These usual differences are summed up in the table 8 hereafter.

9 Source: Dow Jones Guide to the Secondary Market Buyers, “A good time to invest in secondary funds”, June 2008 10 Source: Preqin Ltd, “The private equity secondaries boom –When will it occur?”, December 2009

page 20 | A thorough understanding of PE