When buyers sell

Funds of funds are taking advantage of price discrepancies to become opportunistic sellers.

Funds of funds are taking advantage of price discrepancies to become opportunistic sellers.

Partners Group‘s €800 million portfolio is the latest example of a fund of funds coming to market hoping to sell tail-end fund stakes.

They are not alone in selling these bundles, generally considered to be those made up of stakes in funds 10 years or older.

It makes sense for managers traditionally on the buy-side, including funds of funds, to get rid of fund stakes containing only a few old assets.

For the most part, this is for administrative reasons; to clean up aged portfolios with little remaining value to be realised. If managers can unload those tail-end funds at an attractive price, they will typically sell to avoid the ongoing costs of managing them.

Generally speaking, when buyers act as sellers, it varies greatly as to which team within a fund of funds conducts the sale process. It could be its primary team, its secondaries team, or a combination of both, sources say.

Greenhill Cogent found in its mid-year report that these types of tail-end transactions represented more than 30 percent of volume in H1, up from 20 percent of volume in 2015.

But when it comes to traditional buyers becoming sellers, one secondaries advisor told Secondaries Investor that they are also increasingly opportunistic sellers of portfolios – tail-end or not – capitalising on divergent views on pricing.

“Funds of funds are using the market to make a profit,” the advisor said, seeing a dislocation between what buyers are willing to pay and what they are holding the assets at.

One fund of funds manager noted this year that most of his firm’s selling activity is designed to wind up older funds, but it also sells to take advantage of price discrepancies.

The firm occasionally identifies “market outliers” in terms of pricing; sometimes with bidders willing to pay more than what the firm holds or even expects to realise the assets for. “We’ll take advantage of that and execute,” he said.

Another advisor said that three or four years ago, such arbitrage trading represented a tiny fraction of what funds of funds were selling. It has, however, slowly grown to represent almost a quarter of what they are currently selling.

“Fund of funds sales are still predominantly tail-end portfolios, but there’s also more opportunistic selling,” he said. He added that funds of funds, as regular buyers, have the best view on pricing for assets. As with any other market, whether it’s public equities or fixed income, buyers and sellers often have different points of view on the value of an asset.

But there are some downsides to opportunistic selling, especially when it gets to the point when funds of funds are “flipping” fund stakes for a quick gain, which is admittedly rare.

For one thing, a quick flip generates a good internal rate of return, but a very small multiple.

And frequent turnovers could test relationships, particularly with underlying funds’ general partners that need to approve the transfers, noted another secondaries buyer.

For now, opportunistic sales from those traditionally on the buy-side represent only a small fraction of the market. If they grow, relationships and long-term results may suffer.

Are you worried about increased opportunistic selling for quick gains? Let us know what you think: marine.c@peimedia.com