The case for selling tail-end stakes

Data from NYPPEX and Elm Capital show holding on to the oldest of these assets might not be worth the trouble.

Older tail-end funds are delivering shrinking returns and should be sold, according to NYPPEX Private Markets.

Funds of 13-15 years in age generated an annual return of -0.24 percent in the 12 months to 30 September, according to a February report by the intermediary. This compares with returns of 4.43 percent for funds of between seven and 12 years of age.

Private equity funds aged 12 or older accounted for 33 percent of unrealised value worldwide as of the end of the third quarter, according to NYPPEX’s analysis of 3,420 private equity funds of 2001-17 vintage.

“In general, as private equity funds extend terms, annual returns decline to investors,” said chief executive Larry Allen.

The report concludes that investors can gain 1,200 basis points in annual returns by selling funds older than 13 years and reinvesting in assets of between one and six years in age, which are returning an average of 11.9 percent per year.

Separately, advisory firm Elm Capital said that 56 percent of the deals it worked on last years were sales of tail-end stakes, as sellers took advantage of the high pricing environment to generate liquidity from older assets.

Funds of funds drove the sell-off, accounting for 48 percent of all secondaries sales by seller type. Unlike in previous years, when portfolios sold by funds of funds were dominated by older vintages, sellers included newer funds last year, helping boost the value of portfolios on the secondaries market.

“These portfolios have typically comprised some attractive industry names allowing the funds of funds to both de-risk their more recent vintage vehicles and to secure attractive IRRs in respect of individual vehicles’ hurdle rates,” Elm noted in its report.

Tail-end secondaries were traditionally the preserve of a few firms, such as Blackstone’s Strategic Partners and Hollyport Capital, which in October held a $500 million final close on its sixth fund dedicated to small tail-end stakes.

A growing numbers of buyers have become involved in the strategy in recent years, driven by high amounts of dry powder and considerable unrealised net asset value in older funds. Coller Capital estimates that there is $313 billion left in funds from vintage years 1999-2006.