NAVs and nuance

Last year, single-digit discounts became commonplace for portfolios of private equity fund interests – a trend that’s continued and grown stronger still as portfolios’ net asset values (NAV) have risen alongside equity markets.

Today, it seems most buyers are even prepared to pay a premium for good quality fund interests. “It’s worrying,” says one global fund of funds, noting its secondaries team has been losing out on price for the past couple quarters.

Five percent is the standard premium one large secondaries player says it has been paying lately. For them, it’s most important to deploy capital into quality names quickly, getting money to work for LPs. Ten percent is also something they can get comfortable with, for the right fund(s) and particularly if there’s already a track record of strong exits, they say.

“We’re not discount buyers,” the head of another fund of funds told us this week, noting their strategy too was more about finding good assets above all else.

But at what point does a premium become unpalatable?

A number of people have talked to us recently about a Hellman & Friedman fund stake selling for a 30 percent premium. One bidder – who was knocked out after they only offered 20 percent above NAV – expressed surprise the pricing ended up so high.

Was it simply the result of a hot market that’s got a number of players looking to put their capital to work?

Not exactly, a number of industry insiders say. Sure, competition plays a part. But many also point out the winning bidder would have had a good reason for offering that 30 percent premium – with one veteran broker noting that over the years, he’s even seen deals go for 100 percent premiums if the buyer has strong enough strategic reasons – perhaps more relationship-driven – for doing a deal.

All of this is a good reminder that NAVs – and market pricing in general – don’t always tell the full story. Sometimes all the talk of premiums and discounts can oversimplify the factors at play, including that risk/return objectives will differ from buyer to buyer and impact how they price bids.

As one advisor is fond of saying, it’s all about the nuance. Not just the NAV.