Research & Data

Secondaries means discounts

Shares sold on the secondaries market usually garner discounts, according to a white paper from investment and advisory firm Arnerich and Massena.

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Selling shares on the secondaries market usually means selling at a steep discount, according to a recent white paper on private equity investing published by Portland, Oregon-based investment and advisory firm Arnerich and Massena.

The white paper indicates liquidity events on the secondaries market are often the source of return for private equity investors; however these liquidity events take place at a discount, “depending on market environment” and “company-specific factors”.

Arnerich Massena chief executive officer and senior advisor Anthony Arnerich believes discounts represent the bulk of the market. “I would say there are partnerships trading at premiums, but the vast majority trade at discounts, considering the vast majority of funds are not premium funds.”

Arnerich and Massena’s goal when writing the private equity investing white paper was to educate its clients – which include high net worth individuals, foundations and endowments – to be better investors.

“We’re trying to equate private equity to buying public stock without liquidity. We’re trying to create the analogy that purchasing equity in a company is somewhat similar and dissimilar to public markets,” Arnerich said.

However, the white paper contradicts recent reports that indicate secondaries pricing has reached record-highs.  The average high bids for buyout transactions reached 100 percent of net asset value during the first half of 2014, and according to Cogent Partners director Andy Nick, premium pricing of between 105 percent and 100 percent could be seen in the future.

Arnerich and Massena didn’t spend a lot of time discussing the secondaries market in the white paper however, because it’s another level of liquidity, Arnerich explained.

The Portland-based firm has invested between $500 million and $700 million in private equity fund stakes on the secondaries market since it was founded in 1991 –  but has never paid par or above. The firm has invested between $20 million and $50 million in direct secondaries, Arnerich said.