Not keeping it in the family

Donald Trump's picks for cabinet secretaries have brought a raft of surprises. What secondaries market participants weren't expecting was that it would spur dealflow.

Mike Pence might just be the most popular man in the secondaries market right now. The US vice-president’s tie-breaking vote last week to confirm billionaire Betsy DeVos as education secretary may have displeased some in pedagogic circles, but it did mean DeVos must now sell at least $180 million in private fund stakes to avoid potential conflicts of interest as she takes up the post.

A businesswoman and daughter-in-law of one of Amway’s co-founders, DeVos now has less than 90 days to divest her interests in various vehicles including secondaries funds managed by Partners Group, PineBridge Investments and Coller Capital, as Secondaries Investor reported last month.

So how big is the high-net-worth and family office market and is it a source of dealflow secondaries participants should pay more attention to?

Firstly, it’s important to note that wealthy individuals and family offices are sometimes grouped together as a seller type, as many private individuals hire professional teams to manage their money, or outsource investments to multi-family offices. Both seller types are notoriously private, so data on how much they contribute as sellers is “anecdotal at best”, one advisory source told me.

That said, here are a few estimates: Nico Taverna, head of secondaries at Zurich-headquartered Adveq, tells me as much as 25 percent of his firm’s secondaries dealflow comes from high-net-worth investors and family offices, while Greenhill Cogent puts individuals in its “other” category of seller types, which accounted for 12 percent of sellers by fund count last year.

While not on the radar of the large buyers, it’s a promising market for niche firms, though there are unique challenges to deal sourcing and closing.

One such hurdle is that high-net-worth individual and family offices often invest in private equity through feeder funds held by private banks. When a client wants to sell a stake in these vehicles, the process the seller, intermediary and buyer must all go through is nothing short of a “massive headache”, Sunaina Sinha, managing partner of Cebile Capital, tells me.

On top of that, the bank may simply offer a client’s interest to other internal clients, negating the wider market and flying under the radar of intermediaries’ deal volume reports.

But buyers willing to put up with a few headaches are looking at a potential goldmine. The head of one multi-family office tells me many clients don’t even know the secondaries market exists.

“Families are not necessarily very aware that they can sell things and don’t necessarily have very realistic expectations of what is involved to sell something,” the source says. “They’re not really aware of what a sale involves, or the fact that it’s even possible.”

Ultimately, while dealflow from high-net-worths and family offices may be sporadic and small in nature, it is a largely untapped source of potential deals. And in an environment of falling deal volume, buyers and intermediaries will do well to look under every rock.

What is the potential of the high-net-worth individuals and family office market? Let me know your thoughts: or @adamtuyenle