Discounts on pricing less important to LPs

LPs are coming to accept that big discounts on entry don't necessarily mean strong returns, an industry conference has heard.

It it becoming less important to limited partners that secondaries funds buy at a discount, a conference has heard.

Speaking on a panel at the PE Insights conference in London last week, Tim Flower, a managing director with HarbourVest Partners, said growing numbers of LPs understand that the net asset value of a fund on entry is not necessarily indicative of its return potential.

“We’ve done several deals at a 10 or 15 percent premium that are some of our best,” Flower said. “LPs are surprised and we’re very happy to take them through why [the deals proved successful]…The obsession with discount has somewhat moved on.”

Understanding the asset, the general partner and their approach to valuation is central to finding hidden bargains, said Mitesh Pabari, a principal at Hamilton Lane: “For example, some Italian funds keep their assets at cost for tax reasons. You have to take account of what the journey has been. Is the GP over-marking assets? If you know them well enough, you’ve got a perspective on that.”

While agreeing that the correlation between the discount on entry and return is low, Chi Cheung, a partner with Glendower Capital, said his firm has an “allergic reaction” to paying premiums.

“Our goal is to deliver top-quartile, buyout-like returns. If you’re paying a premium to top-quartile buyout funds, you’re not going to beat those returns,” he said.

The panel was chaired by head of secondaries at the European Investment Fund Joaquín Alexandre Ruiz Tarré and also featured ICG Strategic Equity managing director Ricardo Lombardi and Michael Camacho, a principal with Rede Partners.

The average discount paid for a buyout fund was 6.2 percent in the fourth quarter of last year, compared with 5.3 percent a year before, according to research by UBS’s secondaries advisory group published in March.