Investors who want assets that offer both higher returns and liquidity may find the answer in the secondaries market.
Secondaries Gain Traction in Italy
A growing number of investors in Italy are looking at the private equity secondaries market as a possible solution to their liquidity constraints, says Giuseppe Salamone, associate investment director at Greenpark Capital, a purchaser of illiquid private equity assets from primary investors.
Accessing deal flow is made more difficult by an almost complete absence of intermediaries.
Elsewhere in Europe and the US, the secondaries market is kept moving by a group of specialist financial advisers, such as Cogent, UBS, Credit Suisse and Triago, but Italy only has a few local market participants. Greenpark did its first deal in Italy in 2003, acquiring a position in a mid-market fund.
Institutional investors normally operate on the basis of a long-term investment horizon, but the volatility of the current markets and continuing uncertainties stemming from the global financial crisis have increased the importance of liquidity and transparency.
A growing number of investors are therefore turning to secondaries as an answer, says Salamone.
Banks and insurance groups are having to meet increased capital adequacy rules, which make their private equity investments more expensive to hold.
Just as banking groups are spinning off non-core assets, such as fund management businesses, so they are also having to exit from private equity investments before the end of the natural life of the fund.
Insurance companies are now also taking greater interest in the asset class, says Salamone.
“Until a few years ago regulatory issues meant it was difficult for insurers to invest in private equity in Italy, but this has changed. Among other factors, we expect this to continue to drive demand in the long term.”
A boost to the Italian private equity market was the launch last year of the Fondo Italiano di Investimento, with €1.2bn AUM.
The fund is targeted at the small to mid-cap market, which is the mainstay of Italy’s industrial output.
Research from placement agent Acanthus Advisers suggests investment in primary funds in Italy last year totalled just €900m. Therefore, says Salamone:
“The FII fund is a big injection of capital into the market, and will provide a significant boost to fund raising and investment.
“Secondaries have distinct characteristics, compared to private equity fund of funds. For investors in need of cash flow, secondaries can obtain a return a lot more quickly. The return from a fund of funds exhibits a classic J-curve, whereby returns are made towards the end of the fund’s life. With secondaries, the time lag between investment and return can be much shorter,” says Salamone.
When deciding on which funds to invest, private equity fund of funds take a view on the geographic focus, the strategy and the track record of the manager.
For investors interested in transparency: “Secondaries funds have greater visibility of the underlying portfolio of the target funds, and where the portfolio is going,” says Salamone.
Fund of funds also have a double layer of fees. Salamone says: “We manage to neutralise a big portion of the fees, as we don’t pay fees for the best part of the investment period of the underlying funds and we factor the fees in our pricing.”
He adds: “Investors generally appreciate secondaries for the lower fees, but also for the instant vintage diversification they provide. Certain vintages can be avoided, or the portfolio can be focused on the more mature vintages, if that is what is required.”