Many have tried to drag the secondaries market into the digital age. Nasdaq alone has been involved in three such ventures, teaming up with SharesPost in 2014 to create an online platform for trading limited partnership stakes, launching its own platform in 2017 and partnering with PJT Partners to launch a product geared towards GP-led deals in 2019.
Several of these firms are now defunct or were swallowed by businesses with broader mandates. Others, such as Palico, are very much active, doing around $250 million of deal flow in 2020, the firm told Secondaries Investor. It is striking, however, that no-one has yet built a dominant market position and that volumes traded digitally are still dwarfed by those in the traditional market, despite the first platforms having emerged as far back as 2009.
Though much more commoditised today, the process of buying and selling fund stakes is still bureaucratic. As well as getting consent for transfers from general partners, the need to comply with regulations, like those around public-to-private transfer restrictions, invariably adds expense and friction. The trades executed on these platforms tend to be smaller, making the effort hard to justify for buyers of any scale.
There are signs, though, that this could be about to change. On Tuesday came the news that Lexington Partners will become a designated buyer of stakes sold by investors on Moonfare, a Berlin-headquartered platform that allows individuals to invest in private funds.
Founded in 2017 by former KKR executives Steffen Pauls and Alexander Argyros, Moonfare has grown rapidly. Clients on its platform have invested upwards of €500 million so far into feeder funds exposed to fund managers such as EQT, Carlyle Group and Warburg Pincus, with a minimum commitment of as little as €50,000.
The potential benefits of the tie-up are clear. For sellers, knowing that a large secondaries buyer will evaluate your portfolio brings greater execution certainty and will likely give investors the confidence to commit more on a primary basis. Chief executive Pauls described illiquidity as “one of the main concerns left standing between individual investors and allocations to private equity”.
Moonfare’s investors will be able to sell their fund stakes to Lexington and other investors on the platform through a “formal process” held twice a year. For Lexington, this should mean larger transaction sizes than if it were trading bilaterally.
“What Moonfare has done is amalgamate stakes from across its investors and SPVs,” said Sunaina Sinha of advisor Cebile Capital. “[Due to the cost] the secondaries market simply didn’t transact with individuals with very few exceptions.”
Secondaries Investor understands that Lexington is already an investor in all the funds on Moonfare’s platform, addressing some issues regarding GP consent – at least until new names are added.
What does the tie-up mean for the adoption of technology in the secondaries market overall? While it increases liquidity for individual investors, Moonfare’s asset base is – thus far, at least – a drop in the PE ocean. The benefits of this arrangement seem to derive from its relatively small size and well-defined parameters – a select group of individuals selling a fixed collection of high-quality funds to a secondaries buyer with intimate knowledge of those funds. Change any of these pillars and the fine balance could easily slip.
Yet, at a time when the private equity industry is finding more ways to attract retail investors’ capital, the tie-up could provide an effective – if not endlessly scalable – model for others to follow.
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