This week Secondaries Investor caught up with Coller Capital chief investment officer Tim Jones to discuss the expanding secondaries seller base and use of leverage. While Jones declined to comment on Coller’s latest fundraise, he shared his experience with some of the market’s largest sellers.
How would you characterise the secondaries market last year?
2014 was 2007 déjà vu – the year of high priced fund books. It was also a year of cheap leverage, which obviously helped oil the wheels. All this brought out a huge number of sellers, particularly large pension plans in North America, which used the secondaries market as a portfolio management tool. Volume last year was driven by pricing for these transactions and some selling by sovereign wealth funds. At the same time, there was also the continuing restructuring and de-leveraging of the banks. They are much more strategy-driven though.
Coller often buys assets from banks; how do they differ from other sellers?
Banks are problem-solving for something. They are looking for a holistic solution to their non-core business, of which private equity is – relative to their huge balance sheets – a small part. It’s a very different dynamic – their approach is ‘can you help me solve this problem?’ They also like lending to secondaries because of the low risk involved, so they will use their balance sheet to help you buy their assets if they can. Banks aren’t the only sellers with problems to overcome, though – insurance companies in Europe, for example, face similar problems, and a huge number of LPs and GPs are trapped in pre-crash era funds that are becoming increasingly unviable.
Are other secondaries sellers, aside from banks, becoming more attuned to leverage? How was 2014 ‘the year of leverage’?
Leverage is most noticeable in the ‘plain LP interest’ market, which is at the moment mainly sold at auction. It’s a trend that actually started some time ago. A bidder looking at a ‘vanilla’ fund book will bid some equity and some third party bank debt. If it prices at a 1.3x money multiple, using leverage can give the buyer a 1.4x or 1.5x return. Many more bidders are willing to do this in today’s market.