Avt Secondaries Analysis 2010

PE1
Private Equity Secondary Market

PE2 Valuation Analysis
Arnaud van Tichelen

C ARACALLA SCAL AR
P A R T N E R S
ICADE, Faculty Advisor: Rocío Sáenz-Díez
London, September 2010
TM
the marketplace for alternative investments

© 2010 by Arnaud van Tichelen. All rights reserved. This work is registered with the UK Copyright Service:
Registration No: 96521. Short sections of text not to exceed two paragraphs, may be quoted without explicit
permission provided that full credit including notice is given to the source.
‐ 2 ‐
CONTRIBUTORS OF THE STUDY1

ABOUT THE AUTHOR
Arnaud van Tichelen recently graduated with distinction from ICADE’s international business
administration program (E‐4). During ICADE, Arnaud worked 6 months at UBS within the
M&A team and 6 months at Comgest (asset management) as an equity analyst. He currently
works in the Investment Banking Division (Consumer products and retail) of UBS in London.
He can be contacted at a.vantichelen@gmail.com

1
Three other investment funds shared their views but requested to remain anonymous.
The author is grateful to Professor Rocío Sáenz‐Díez, to Trevor Giles from Caracalla Capital and to Nick Hatch
from Scalar Partners for their support in this work but also to the investment professionals who contributed to
this study for their precious time and valuable insight.

W e a r e pro ud to h av e as s is t ed w i th th is s tud y . W e b e li e ve i t pro v i des an
e xc elle n t pr imer to the p riva te e qu i ty s eco nda r y mark et along with impor ta n t
m ar k e t h is to r y a nd v alu a ti on t ec hn iq ues . W e h op e in ves tors w il l le arn an d pr ofi t
from th is work.
Trevor S. Giles CMA CFA

Managing Director
C ARACALLA
capital sourcing
corporate finance
gp / lp secondary
for the canadian market
to c ontac t us
va ncou ver , br itish c olu mb ia , c ana da 1 .8 77 .3 54 .4 422
o n the w eb
w w w .ca r aca l la .ca

We leverage our network and expertise to help limited
partners achieve their private equity allocation
objectives including: venture and private equity fund I
sourcing, screening, due diligence, monitoring and I
reporting, fund accounting, and secondary advisory

Feel free to contact us:

San Francisco Office Salt Lake City Office
th
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San Francisco, California 94109 Salt Lake City, Utah 84095
+1 (415) 283‐3280 +1 (877) 872‐3643

secondaries@scalarpartners.com
www.scalarpartners.com/secondaries
-3-
ABSTRACT
During the current liquidity crisis, the Private Equity industry has been reshaped and
experienced a significant increase in the level of interest and activity in the secondary
market. However, despite its growth, the market is still inherently inefficient and pricing
tends to vary widely among bidders. Investors need to be aware of the challenges and
dynamics of this fast evolving market and to carefully analyze each potential sourced
opportunity.
This research paper attempts to analyze the characteristics of the Private Equity
secondary market. Furthermore it analyses the valuation in the market and provides an
actual valuation of a real secondary investment opportunity supported by the development
of a secondary valuation model. This analysis is based on more than 25 interviews conducted
with expert participants in secondaries.
Currently, transaction volume for secondaries is near an all-time high which
generates further liquidity and benefits the asset class as a whole. Near-term and long-term
factors are driving a fast growing market which many expect will grow about 16% annually
(CAGR) in the next five years. However opportunities on the market are mirrored by
significant challenges. Although the top-down method is helpful in determining the value of
a potential secondary, empirical data clearly shows that a bottom-up valuation is crucially
important in determining the value of an asset in the secondary market.
Keywords: Private Equity, secondary market, secondaries, liquidity, valuation, selling

limited partnership capital commitments, secondary fund, LP, GP, fundraising, unfunded,
carried interest, waterfall.
-4-
CONTENTS
CONTRIBUTORS OF THE STUDY................................................................................................. II
ABSTRACT ................................................................................................................................... III
CONTENTS ................................................................................................................................... IV
TABLE OF FIGURES ......................................................................................................................... IX
LIST OF TABLES ............................................................................................................................... XI
ABBREVIATIONS AND SYMBOLS..............................................................................................XII
I. INTRODUCTION....................................................................................... 15
II. CHARACTERISTICS OF THE PRIVATE EQUITY SECONDARY

MARKET ...................................................................................................... 18
1. DESCRIPTION OF THE MARKET ........................................................................ 18

1.1. Theoretical framework ................................................................................... 18
1.1.1 Private Equity basics .................................................................... 18
1.1.2 An illiquid investment ................................................................. 19
1.2. Volumes of investment in Private Equity................................................. 19
1.2.1 The size of the primary market ................................................ 19
1.2.2 The size of the secondary market ........................................... 21
1.3. Different reasons to resort to the market ................................................ 23
1.3.1 Reasons that motivate the sellers ........................................... 23
1.3.2 Reasons that motivate the buyers........................................... 26
1.4. The secondary market participants ........................................................... 29
1.4.1 The advisers .................................................................................... 29
1.4.2 The sellers ........................................................................................ 33
1.4.3 The buyers........................................................................................ 35
1.4.4 Other emerging participants: the private marketplaces 38
1.5. History ................................................................................................................... 40
-5-
1.5.1 The beginning of the market (1982-2002).......................... 41

1.5.2 The growth of the market (2003-2007) ............................... 42
1.5.3 The credit crunch (July 2007-2009) ...................................... 43
2. THE TRANSACTIONS ON THE MARKET: DESCRIPTION OF THE DIFFERENT
STRUCTURES AND SALE PROCESSES .................................................................. 46
2.1. Different types of transactions ..................................................................... 46

2.1.1 Sale of limited partnership interests ..................................... 46
2.1.2 Direct sale ......................................................................................... 46
2.2. Different sale structures ................................................................................. 47
2.2.1 Straight sale ..................................................................................... 49
2.2.2 Strip Sale ........................................................................................... 50
2.2.3 Stapled Secondary ......................................................................... 50
2.2.4 Structured secondary sale ......................................................... 51
2.2.5 Total return Swaps ....................................................................... 53
2.2.6 Securitisation: CFOs...................................................................... 54
2.2.7 Securitisation of the unfunded ................................................. 54
2.2.8 Spin-out ............................................................................................. 55
2.2.9 Tail-end ............................................................................................. 55
2.3. The different sale processes .......................................................................... 56
2.3.1 GP option: arrange a sale through the manager ................ 56
2.3.2 Exclusive sale with a secondary buyer ................................. 56
2.3.3 Open auction ................................................................................... 57
2.3.4 Targeted auction ............................................................................ 57
2.4. The execution of the transaction ................................................................. 57
3. LEGAL AND TAX CONSIDERATIONS .................................................................. 58
3.1. Legal considerations in the revision of the LPA .................................... 58
3.1.1 The Consent of the GP .................................................................. 58
3.1.2 Pre-emption rights: Right of First Refusal (ROFR)........... 59
3.1.3 Legal reporting requirements .................................................. 59
3.1.4 Sale notification requirements ................................................. 59
3.1.5 Payment of costs incurred by the transaction ................... 59
3.2. Legal considerations in the negotiation of the Purchase and Sale
Agreement ............................................................................................................. 59
-6-
3.2.1 The contingent conditions ......................................................... 60

3.2.2 Material Adverse Change clauses ............................................ 60
3.2.3 Clawback provisions .................................................................... 60
3.2.4 Threshold funds ............................................................................. 60
3.2.5 Indemnifications ............................................................................ 61
3.2.6 Joint liability: French legal framework ................................. 61
3.2.7 Stapled transaction clauses ....................................................... 61
3.3. Tax considerations ............................................................................................ 61
3.3.1 Taxation of Private Equity funds ............................................. 61
3.3.2 The United States: the 2% law ................................................. 62
4. THE FUTURE OF THE MARKET .......................................................................... 62
4.1. Empirical demonstration: The primary market drives the secondary
.................................................................................................................................. 62
4.1.1 Secondary market projections model ................................... 63
4.1.2 Historical relationship between the secondary base and the
volume in the secondary market ........................................................... 64
4.1.3 Secondary market transaction volume: 2010-2014E ..... 64
4.2. Future growth catalysts .................................................................................. 66
4.2.1 The “denominator effect” ........................................................... 66
4.2.2 The new requirements of the financial institutions......... 68
4.2.3 An increasing pressure on the investors: fall in the
distributions combined with an increase in the capital calls ..... 69
4.2.4 The improving economic outlook ........................................... 71
4.2.5 The bid offer spread is reduced ............................................... 72
4.2.6 A market that is becoming a more important asset class for
investors ......................................................................................................... 73
4.3. Ever more structured operations................................................................ 74
III. VALUATION IN THE PRIVATE EQUITY SECONDARY MARKET 76
1. HISTORICAL MARKET VALUATIONS ................................................................. 76

1.1. Transactions: historical valuation .............................................................. 76
1.1.1 General trend .................................................................................. 76
1.1.2 The valuation depends on the type of asset ........................ 78
1.1.3 The valuation depends on the funding ratio ....................... 79
-7-
1.1.4 The valuation depends on the vintage year of the fund . 80

1.2. Listed Private Equity funds ........................................................................... 81
1.2.1 Concept .............................................................................................. 81
1.2.2 Historical trading: a proxy towards the valuation in the
secondary market ........................................................................................ 82
1.2.3 Limits of comparison with the Private Equity secondary
market .............................................................................................................. 83
2. HOW TO THEORETICALLY VALUE THIS ASSET................................................. 85
2.1. Top-down method............................................................................................. 85
2.1.1 The transaction or trading value/NAV ratio ....................... 85
2.1.2 Comparable transactions method ........................................... 86
2.1.3 The valuation method by the trading multiples ................ 86
2.2. Bottom-up method: the valuation model ................................................. 86
2.2.1 Structure of the bottom-up valuation method of a fund’s
interest............................................................................................................. 87
2.2.2 Valuing the underlying asset..................................................... 87
2.2.3 Project the unfunded.................................................................... 89
2.2.4 Determine a timing of capital calls/distributions............. 90
2.2.5 Aggregate the cash flows in the fund’s waterfall............... 90
2.2.6 Discount the cash flows by the cost of capital .................... 93
2.2.7 Sensitivity valuation analysis ................................................... 94
3. REAL WORLD VALUATION: EMPIRICAL CONTRAST OF THE TWO METHODS . 95
3.1. Top-down method: market valuation ....................................................... 95
3.2. Bottom-up method: valuation using the model ..................................... 96
3.2.1 Introduce the fund’s financial data and growth estimates96
3.2.2 The analysis and the valuation of the portfolio companies99
3.2.3 Adding of the cash flows in the waterfall of the fund .... 102
3.2.4 Determination and sensitisation of the price of the limited
partnership interest according to different scenarios ................ 106
3.3. Comparison of the results: explanation of the difference................108
3.3.1 Comparison of the results ........................................................ 108
3.3.2 The concept of NAV is subjective .......................................... 108
3.3.3 Each asset is different ................................................................ 108
-8-
3.3.4 The lag of the NAV ....................................................................... 109

3.3.5 A buyers’ market.......................................................................... 110
3.3.6 Key valuation method: bottom-up ........................................ 112
IV. CONCLUSIONS ........................................................................................114
1. CONCLUSIONS .................................................................................................. 114

1.1. Analysis of the secondary market: an opportunity for the Private
Equity industry..................................................................................................114
1.2. The future: growth and sophistication ...................................................114
1.3. Valuation in the secondary market: trend and method ...................116
2. FUTURE RESEARCH ......................................................................................... 117
GLOSSARY ................................................................................................................................118
REFERENCES ................................................................................................................................123
1. BOOKS .............................................................................................................. 123

2. REPORTS .......................................................................................................... 123
3. ARTICLES ......................................................................................................... 127
4. DATABASES ...................................................................................................... 129
APPENDIX ................................................................................................................................131
-9-
TABLE OF FIGURES
Figure 1: Structure of the study ............................................................................................... 16
Figure 2: Different Private Equity styles................................................................................... 18
Figure 3: Raised capital in the primary market ($ billions) ...................................................... 20
Figure 4: Transaction volume in the secondary market ($ billions)......................................... 21
Figure 5: Geographical distribution of the transactions .......................................................... 22
Figure 6: Volume raised by secondary Private Equity funds ($ billions) .................................. 23
Figure 7: Reasons that motivate the sellers in the market (2007/2008/2009) ....................... 25
Figure 8: Reasons for resorting to the secondary market in the next two years (2010-2011) 26
Figure 9: Secondary funds - Top, median and bottom IRR quartiles (by vintage year) ........... 27
Figure 10: The “J-Curve”........................................................................................................... 28
Figure 11: Importance of the secondary market to investors’ Private Equity strategies ........ 29
Figure 12: Breakdown by seller type in the secondary market (2008 vs. 2009)...................... 33
Figure 13: Buyer types (by transaction volume - H1 09).......................................................... 36
Figure 14: Non-traditional buyer types (H1 09) ....................................................................... 38
Figure 15: History of the Private Equity secondary market ..................................................... 40
Figure 16: The beginning of the market (1982-2002) .............................................................. 42
Figure 17: Changes to LPs’ exposure to secondary funds over the years 2008-2009 ............. 44
Figure 18: Proportion of investors who ruled out transactions in 2008 because of pricing
concerns ........................................................................................................................... 45
Figure 19: Two types of secondary transactions: sale of limited partnership interest and
direct sale ......................................................................................................................... 46
Figure 20: Transaction volume breakdown – (Limited partnership interest and Direct sale)
(2007 to 2009) .................................................................................................................. 47
Figure 21: Different sale structures in the secondary market ................................................. 48
Figure 22: Comparison of the characteristics of the different sale structures ........................ 49
Figure 23: Traditional sale structure: straight sale of a limited partnership interest .............. 50
Figure 24: Structure of a stapled secondary sale of a portfolio of limited partnership interests
.......................................................................................................................................... 51
Figure 25: Structured joint-venture sale of a portfolio of limited partnership interests ........ 52
- 10 -
Figure 26: Total return swaps for a portfolio of limited partnership interests ....................... 53
Figure 27: Securitisation by means of CFOs ............................................................................. 54
Figure 28: Securitisation of the unfunded ............................................................................... 54
Figure 29: Comparison of the characteristics of the different sale processes ........................ 56
Figure 30: Secondary base (in bn$) .......................................................................................... 64
Figure 31: Estimates of the secondary market transaction volume according to the historical
relationship ($ billions) ..................................................................................................... 65
Figure 32: LPs’ anticipated level of Private Equity commitments at the end of 2010............. 67
Figure 33: Plans to address the over allocation issue .............................................................. 67
Figure 34: Distributions as a % of NAV ..................................................................................... 70
Figure 35: Anticipated changes in capital calls in the next 12 months .................................... 71
Figure 36: Timing of the tightening of the bid/offer spread .................................................... 73
Figure 37: Anticipated changes to LP’s exposure to secondary funds over 2010-2011 .......... 74
Figure 38: Secondary bids over time (as a % of last fund’s NAV) ............................................ 77
Figure 39: Value of the best bid in comparison with the total exposure to the asset (NAV +
unfunded) ......................................................................................................................... 78
Figure 40: Historical valuation of the best bids received for each fund type (% of the NAV) . 79
Figure 41: Valuation according to the vintage year of the fund (H1 2009) in % of its NAV .... 81
Figure 42: Historical trading of the listed Private Equity funds – Premium / (discount) with its
NAV ................................................................................................................................... 82
Figure 43: Comparison between trading of listed Private Equity funds and bids received in
the secondary market ...................................................................................................... 83
Figure 44: Two valuation methods of the secondary assets.................................................... 85
Figure 45: Structure of the bottom-up valuation method ....................................................... 87
Figure 46: Dry powder in the secondary market in 2010 ($ billions)..................................... 110
Figure 47: Estimate of the dry powder in the secondary market in 2011 ($ billions) ........... 111
- 11 -
LIST OF TABLES
Table 1: Financial advisers in the secondary market ............................................................... 31
Table 2: Legal advisers on the secondary market .................................................................... 32
Table 3: The ten largest dedicated fund managers at the end of 2009................................... 37
Table 4: Distribution of the transaction probabilities during the life of a fund....................... 63
Table 5: Tier 1 capital and 3% cap of five major US banks....................................................... 69
Table 6: Effect of the funding ratio on the valuation (H1 2009) .............................................. 80
Table 7: Projection multiples of the unfunded according to the quality of the management
team ................................................................................................................................. 90
Table 8: Cash flows of the fund and distributions - Waterfall ................................................. 93
Table 9: Top-down valuation of a limited partnership interest ............................................... 95
Table 10: Main characteristics of the fund .............................................................................. 97
Table 11: Financial data and growth hypotheses of a portfolio company .............................. 98
Table 12: Analysis and projection of the operating data of a portfolio company (base case)
........................................................................................................................................ 100
Table 13: Projection of the debt repayment and valuation of the investment ..................... 101
Table 14: Cash flows from the fund’s investments ................................................................ 103
Table 15: Calculation of the costs of the fund ....................................................................... 103
Table 16: Waterfall of the fund .............................................................................................. 104
Table 17: Net cash flows available for LPs ............................................................................. 104
Table 18: Determination of the returns of the secondary investor according to the
acquisition price ............................................................................................................. 105
Table 19: Determination of the price to be paid according to scenarios and returns .......... 106
Table 20: Sensitivity of the returns to the different key variables ........................................ 107
Table 21: Contrast of the valuation according to the different methods.............................. 108
Table 22: Discrepancy in the valuation of the assets (H1 2009) ............................................ 109
- 12 -
ABBREVIATIONS AND SYMBOLS

ASCRI Asociación Española de entidades de Capital Riesgo (SPAIN)
AVCJ Asian Venture Capital Journal
BVCA British Private Equity & Venture Capital Association (UK)
CAPEX Capital Expenditures: Investment in fixed assets
CFO Collateralized Fund Obligation: debt security of Private Equity fund or
hedge fund assets
DCF Discounted Cash Flow: valuation method consisting in valuing the asset
by discounting its future cash flows
EBIT Earnings Before Interest and Taxes
EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization
EV Enterprise value (equity+ debt)
EVCA European Venture Capital Association
FCF Free Cash Flow
GP General Partner: fund manager
IRR Internal Rate of Return
IRS Internal Revenue Services: tax authority in the USA
KYC Know Your Customer: due diligence requirement that financial
institutions must perform to identify their client and ascertain relevant
information to doing financial business with them
LBO Leveraged Buy Out
LP Limited Partner: Co-owner of a limited partnership
LPA Limited Partnership Agreement: constitution agreement of a Private
Equity fund
MAC Material Adverse Change: legal provision that allows the acquirer to
withdraw from the transaction if the target suffers a substantial change
MBO Management Buy Out
NAV Net Asset Value
NOPAT Net Operating Profit After Taxes
NPV Net Present Value
NVCA National Venture Capital Association (USA)
PEF Private Equity Fund
PSA Purchase and Sale Agreement
QMS Qualified Matching Service: approved management services for
secondary transactions by the tax authorities
ROFR Right Of First Refusal
SPA Share Purchase Agreement
SPV Special Purpose Vehicle
VC Venture Capital: Private Equity investment style in the early stages of
the development of the companies
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PART I:
INTRODUCTION
I. Introduction - 15 -
I. INTRODUCTION
During the current liquidity crisis, it may be valuable for a limited partner to dispose
of an interest in a Private Equity fund, but how? The secondary market can provide this
desired liquidity which is critically important to limited partners. Many key issues are taken
into account when disposing of an interest, but as Cicero said: “belli nervus pecunia”, money
is the sinews of war, the value of the asset sold, is the key consideration in a transaction in
the secondary market. But how are these assets valued? Why are there such large disparities
between the different bids received for the same assets?
The secondary market is growing constantly and is now a major participant in the Private
Equity industry. From a very private confidential market to a broad liquidity provider for the
investment community, the market has changed dramatically. In 2009, funds raised for the
purchase of Private Equity fund interests accounted for roughly 20% of all Private Equity
funds closed during the year. Over the last decade, the market has become more and more
complex and become the reflection of new opportunities. However, although the market is
being established it remains inefficient.
Motivations for entering the secondary market are increasingly different and complex. What
volumes are traded in the market? Who are the participants? Transactions are becoming
more complex. What are the different sales structures and their characteristics? Beyond
structuring of transactions, why can there be so much price disparity between the bids on
the same asset? Is there a way to accurately value these assets? How could we measure the
fair value of an interest in a fund?
Secondary market literature is limited and due to this lack of information, many investors
and agents still do not understand all of its characteristics, nuances and complexities. No
study giving a comprehensive and thorough overview of the market and its main issues has
been published prior to this paper. This study attempts to answer a lack of information and
to be a guide through the characteristics and valuation of the Private Equity secondary
market.
Structure of the study

The content of this study is organized around the following structure:
The first part (section II) explains the main features of the market. Its basic
characteristics, size, participants, motivations to enter the market and historical
development are detailed (II.1). Also analyzed are the different sales structures and
I. Introduction - 16 -
processes (II.2) as well as tax and legal considerations in such transactions (II.3) in order to
better analyze and project future trends of the market (II.4).
The second part (section III) focuses on the valuation of the assets on the secondary
market. After analyzing the existing market valuations (III.1), the different valuation methods
are explained based on theoretical knowledge and direct experience of secondary market
participants (III.2). Once the theoretical approach of valuing these assets is understood, a
real world valuation is demonstrated. An interest in a Private Equity fund is valued following
two valuation methods: bottom-up and top-down (through the valuation model developed
in partnership with several market participants) in order to demonstrate the optimal
valuation method of assets in the secondary market (III.3).
The last part (section IV) lists the main conclusions of the study and its investigations.
Main considerations on the market, its future and the valuation of these assets are
highlighted in order to summarize the key contributions of the study.
To support the present study, appendices are attached containing databases of market
participants, marketing documents of the present study, summaries of meetings and calls
with sponsors of this study, analysis of historical data in the market and a projection model
of secondary transaction volume.
Figure 1: Structure of the study
Source: Author’s own

PART II:
CHARACTERISTICS OF THE PRIVATE

EQUITY SECONDARY MARKET
II. Characteristics of the Private Equity secondary market - 18 -
II. CHARACTERISTICS OF THE PRIVATE EQUITY SECONDARY MARKET
1. Description of the market
1.1. Theoretical framework
1.1.1 Private Equity basics2

Private Equity funds are limited partnerships, the purpose of which consists of taking
short-term interests in unlisted companies. The objective sought is that with the help of the
capital investment and fund management team, the investee company increases in value
and the fund exits obtaining a profit.
Private Equity funds (PEF) can be invested in a many different ways according to their
investment strategy (investment style, the type of assets in which it invests or targets).
Figure 2: Different Private Equity styles
Source: adapted from JP Morgan Asset Management; «Secondary Private Equity Discussions»; 2009.
A Private Equity Fund (PEF) is a collective investment scheme through which assets are
administered by an investment firm (the Private Equity firm). The assets are divided into
interests conferring to their holders, the Limited Partners or LPs, a property right thereon3.
The LPs’ commitments are managed by the Private Equity firm acting as the General Partner
or GP which also invest in their own funds, typically providing 1% to 5% of the overall capital.
In making an investment in a PEF, LPs sign a Limited Partnership Agreement or LPA with the
GP. This document, drawn up by the GP and its advisers, governs the relationship between
2
Gómez-Acebo & Pombo abogados y ASCRI; «Capital riesgo (Private Equity) aspectos regulatorios, mercantiles,
financieros, fiscales y laborales»; 2006
3
CNMV, «Reglamento de los fondos de capital riesgo», www.cnmv.is/legislacion/capital_risk/REGLAFON.DOC
(Last accessed: 6 November 2009)
the LPs and GPs. It describes the rights and obligations of the parties and sets forth the
fund’s operating mandate and limitations.
The amount that LPs invest is called committed capital. The LP commits in writing to provide
capital funding within the agreed time limit (in general ten days4) upon notification of the
manager’s capital call. In general, the investor will provide capital over a period of time and
the portion committed by the investor but not yet paid is called the unfunded commitment.
The LPA sets forth details on how the fund is to be managed including the management fee5
which is measured as a percentage of the committed capital or the assets under
management depending whether the fund is in the investment period or liquidation period
(it is generally applied to the committed capital during the investment period and to the
assets under management during the liquidation phase). The management fees are usually
2% but they can differ slightly (between 1% and 3%) according to the manager’s reputation
and fund size.
The LPA also defines the fund’s distribution structure (also called waterfall). The carried
interest is defined in this part. Carried interest represents the fund manager’s share in
capital gains resulting from operations carried out by the fund once the investment of the
LPs has been returned and a minimum return to the investors called the hurdle rate (about
8%) has been provided for. In Private Equity Funds, the carried interest is usually about
20%6.
1.1.2 An illiquid investment

An investment in a PEF is fundamentally illiquid given that LPs commit to fulfilling
their obligation to invest the agreed amount decided in the LPA over a period which is
usually ranges from 10-12 years.
The secondary market is developed in response to this lack of liquidity in this asset class. In
this market existing investments are traded as well as the unfunded part of the commitment
in combination (the most usual) or separately.
1.2. Volumes of investment in Private Equity
1.2.1 The size of the primary market

Primary markets are those in which assets or financial instruments between investors
and companies or banks are issued for the first time.
4
Akin Gump Strauss Hauer & Feld; «Role of the secondaries market and LP trends»; 2009
5
See section III. 2.2.4- ii. The fund management costs
6
See section III, 2.2.4- iii. The waterfall
Figure 3: Raised capital in the primary market ($ billions)
500
455
450
400 370 375
350
300
250 255 246
250
200
133 140
150 117 120
100 81 70 80
50
50
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
7
Source: Author’s own using data from: Private Equity Analyst (1996-1999); Thomson Reuters, AVCJ, EVCA, Asia
Private Equity, NVCA (2000-2008); Preqin (2009).
As the graph above demonstrates, investments in Private Equity increased annually until the
technology bubble burst in 2000. After a short period of decline in new capital raised (mainly
due to Venture Capital funds) the market rebounded from 2002 to 2007 following a period
of macroeconomic expansion. In 2007, after reaching historic highs, the trend reversed due
to the financial crisis and the volume of new capital raised fell dramatically.
In 2009, investments in Private Equity continued to fall and due to a difficult economic
recovery it is forecast that annual volume in the next two years will remain constant8.
According to Preqin, the first quarter of 2010 shows a constant trend with $50 billion raised,
representing an increase of 5% in comparison with capital raised in the first quarter of 20099.
From 2005 to 2008 the Private Equity asset class raised nearly $1.5 trillion. Driven by
attractive returns and the enthusiasm of investors, the Private Equity industry has grown
significantly in recent years from approximately $950 billion in 2003 to $2.5 trillion in 200810.
7
The data used are from a historical analysis of the information published by different market participants. See
appendix 8.3. The selected data are the most accurate and are from recognised and trustworthy sources
8
Bain & Company, Inc; «Global Private Equity Report 2010»; 2010
9
Preqin; «Q1 2010 Private equity Fundraising Update»; 2010 (via Twitter 1 April 2010)
10
Including the NAV of the portfolio and the unfunded. Preqin; «Private Equity secondary market: Short-Term
Boom, Long-Term Growth»; 2009
1.2.2 The size of the secondary market
i. Transaction volume in the secondary market
Figure 4: Transaction volume in the secondary market ($ billions)
18
16.1
16
CAGR 2002-08
13.4
14
12
41%
10.3
10 9.1
8.4
8 7.5
6.9
6
4 3.1
2.4 2.3 2.1
2 1.5
0.6 0.7
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
11
Source: Author’s own using data from: Dow Jones; «Guide to secondary Market Buyers»; 2009 (Sale price +
Unfunded; transactions of traditional participants: funds of funds and secondary funds); UBS Private Funds
Group; «Adams Street Secondary Networking Event»; 2010 (2009).
The data of this market are estimates given that since it is not an organised market
there is no system capable of capturing the exact volume of transactions in the market.
Furthermore, the data that are published represent large-scale transactions in which
secondary dedicated funds or fund of funds were involved. The smaller more numerous
transactions of LPs’ interests are not usually published and therefore their impact is very
difficult to measure.
For a long period of time, the secondary market was nearly invisible given its low volume.
Since 2003 it has become a major market, as can be inferred from the recent media interest
(press, conferences, etc.).
11
The data used are from a historical analysis of the information published by different participants. See
appendix 8.1. The selected data are the most accurate and are from recognized and trustworthy sources
II. Characteristics
cs of the Private Equity secondary market - 22 -
In 2008, transaction volume in the secondary market was over $16 billion. Despite the
magnitude of this amount, this large volume
volume represents less than 1% of the total size of the
Private Equity industry12. Compared with other asset classes, this is a very low proportion of
secondary transactions. This implies that many investors keep their interests until maturity
with little opportunity to change their strategy and sell their investment during this period.
In 2009, according to the present survey shown in appendix (8.1), secondary participants
(advisers and buyers) estimated the secondary transaction volume at an average of $7.5
billion, which represents a 50% decrease over 2008 volume.
Figure 5:: Geographical distribution of the transactions
2007 2008
Europe 1% Europe
1% 21%
2% Asia 43% Asia
50%
76%
USA USA
6%
Other Other
Source: Author’s own using data from UBS Private Funds Group; «Private Equity Secondary Market review»;
2009.
The majority of transactions are carried out in the United States and Europe where the main
participants are present and transactions more significant.
One of the secondary market’s growth drivers is the volume raised in the primary market.
Historically, a positive
sitive direct relationship between the primary and secondary markets
seems to have existed.
ii. Volume raised by dedicated secondary funds

The volume raised by dedicated secondary funds has also grown significantly in the
last five years. Since 2003, funds dedicated
dedicated to the Private Equity secondary market have
raised commitments totalling $75 billion.
12
Secondary transactions in 2008 (Dow Jones
Jon Guide)/Assets managed by Private
te Equity in 2008 (Preqin)= $161
$16
billion/ $25 trillion = 0.64%
Figure 6: Volume raised by secondary Private Equity funds ($ billions)
20
18.5
18
16
14 13.0
12.3
12
10 8.9
7.8 7.2
8 6.4 7.4
6
4.0
4 2.7 2.4
2.0
2 1.1
0.7
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
13
Source: Author’s own based on data from : Dow Jones; «Guide to secondary market buyers»; 2009 (1996-
2008); Preqin; «Private Equity Spotlight January 2010»; 2010 (2009).
In 2009 it was the only segment of Private Equity that grew in comparison with 2008 and
represents 7.5% of the total funds raised14.
According to Campbell Lutyens15 and Probitas Partners16, it is forecast that in 2010
secondary funds will raise some $27 billion if they manage to achieve their fundraising
targets.
1.3. Different reasons to resort to the market

What characterises the market today is the multiplicity of reasons that different
participants have for entering the market17.
1.3.1 Reasons that motivate the sellers

Inability to finance unfunded commitments: This reason is often cited when an
over-commitment strategy is employed. In good times the investors commit more
13
The data used are from a historical analysis of the information published by different participants. See
appendix 8.2. The selected data are the most accurate and are from recognised and trustworthy sources
14
Secondary funds / total funds raised = 246/18.5= 7.5%
15
See appendix 7.13, which includes a summary of the call to Campbell Lutyens (10 March 2010)
16
Probitas Partners; «Adams Street Secondary Networking Event»; 2010
17
Kelly DePonte, Probitas Partners; «Routes to liquidity»; 2009
money than they have to invest in this asset class and then finance capital calls with
distributions from mature funds. But during downturns when the distributions are
reduced they are unable to fund capital calls. They need to sell their interests that
entail large unfunded commitments (i.e. most recent funds).
Urgent need for liquidity (distressed sellers).
To comply with the new regulatory accountancy risk management and capital
requirements (Basel II).
Change in the overall strategy: sale of non-core assets.
Corporate transaction: mergers and acquisitions, restructuring, change in the
management team.
Denominator effect18: due to the fall in publicly traded security valuations the
weighting of other assets increases in the portfolio. This imposes a re-balancing of
the different assets classes in order to comply with the allocation threshold of assets
in the portfolio policy.
Change in the investment strategy: geographical area, sector, vintage year,
change in the management team, asset class…
Reorganisation of the portfolio and exit from problematic funds.
To lock-in performance.
To focus on relationship with some GPs: having interests in few funds allows to
follow a limited number of GPs and therefore to reduce the management and
administrative costs.
To avoid distributing remaining assets of a fund to the LPs: a manager prefers to
sell assets in the secondary market to return cash to his LPs rather than distribute the
fund’s remaining assets19.
18
For more details on the denominator effect, see 4.2.1. The denominator effect.
19
Charles Soulignac, CEO Fondinvest Capital; «Secondary Market in private equity - an asset class in
expansion»; 12 March 2002. www.AltAssets.com (last accessed: 3 February 2010)
II. Characteristics of the Private Equity secondary market
Figure 7: Reasons that motivate the sellers in the market (2007/2008/2009)
2007
13% 14%
17%
56%
Source: Author’s own using data from
In the figure above two major reasons why sellers resort to the secondary market stand out:
active portfolio management and the need for liquidity. Since 2009, due to the credit crunch,
the main reason for selling has become the need to find liquidity.
Figure 8: Reasons for resorting to the secondary market in the next two years (2010-2011)
"Lock in" returns
Re-direct resources to other asset

classes or uses
Re-focus resources on the best-
performing GPs
Re-balance portfolio within the PE
asset class
Increase liquidity
0% 20% 40% 60% 80% 100%
Winter 2009-10 Summer 2007
Source: Author’s own using data from Coller Capital; «Global Private Equity Barometer Winter 2009-10»; 2009.
According to a survey by Coller Capital carried out in the winter of 2009, the main reasons
why sellers are going to use the secondary market in 2010-2011 will be lack of liquidity and
portfolio management (to rebalance their allocation to Private Equity or refocus resources).
1.3.2 Reasons that motivate the buyers

To generate large returns by exploiting market inefficiencies20:
The secondary market is characterised by price and information inefficiencies. Moreover, the
imbalance between the supply and demand for assets may create a buyers’ market.
These returns are reflected in the average IRR of the secondary funds created between 2000
and 2005 which are between 20% and 30% higher than the average of the primary funds21.
20
Goldman Sachs PEG ; «Private Equity liquidity : a perspective on the secondary market »; May 2008
21
Preqin; «Private Equity Secondary Market: Short-Term Boom, Long-Term Growth»; 2009
Figure 9: Secondary funds - Top, median and bottom IRR quartiles (by vintage year)
Source: Preqin; «2009 secondary review»; 2009.
According to a survey by Probitas Partners published in November 2009, more than 50% of
investors believe returns of the best secondary fund managers (those of the top quartile) in
vintage year 2010 will reach an IRR of 20% or more during the life of the fund22.
To optimise the risk-return trade-off of a portfolio:
In some cases the transaction allows investment with preferred conditions in the funds,
providing greater seniority in the capital structure and therefore less risk alongside preferred
returns.
To invest in an identifiable portfolio of assets:
In the primary market, the investor invests in a blind pool and trusts the judgement of the
GP to buy high-performing assets. When buying in the secondary market, the investor knows
the assets in which the fund is invested and can estimate its growth and future value.
To gain access to future funds of a certain GP:
The acquisition of a fund’s interest seeks to develop a relationship with a GP in order to
obtain access to future funds that will be raised.
To diversify the portfolio:
It allows diversifying the portfolio, adding a different vintage year or buying funds from an
outstanding vintage year.
To minimise the impact of the J-curve on the portfolio:
22
Probitas Partners ; «Private Equity Market Review and Institutional Investor Survey»; 2009
At the beginning of the investment, a PEF requires capital to invest (“investment period”)
and in this phase the fund typically shows negative returns. The fund’s return rate reaches a
turning point from the moment in which the fund distributions appear. The effect of this
impact on portfolio returns is called the “J-curve effect”23.
Figure 10: The “J-Curve”
Source: JP Morgan Asset Management; «Secondary Private Equity Discussions»; 2009.
Upon adding more mature assets to a portfolio the J-curve effect is reduced. Some GPs
therefore resort to the secondary market to buy interests in mature funds in order to reduce
this impact.
According to Capital Dynamics, a Private Equity fund takes 5 years to achieve a NAV of 80%
of the committed capital. Buying an interest in a mature fund allows for acceleration of
initial returns and improves liquidity of the portfolio since secondary funds usually generate
earlier distributions24.
However, the main motives that drive the market are those of the sellers. Indeed, in
quantitative terms, the majority of transactions were led by large financial institutions
(banks, insurance companies) that decided Private Equity is not their core business and sold
their interests in the secondary market in order to reemploy this capital to other activities.
That trend is called “active portfolio management”.
For all these reasons, the secondary market increasingly forms part of investors’ strategy.
23
Private Equity Magasine ; «J Curve: la vraie bonne raison d’acheter»; 2009
24
Capital Dynamics; «Perspectives»; 2009
II. Characteristics
Figure 11:: Importance of the secondary market to investors’ Private Equity strategies
22% Not a core part of the

strategy
10% Core part of strategy
68%
Of growing importance to
strategy
Source: Author’s own based on data from Preqin; «Private Equity Secondary Market: Short-term
Short boom, long-
term growth»; 2009.
According to a survey by Fidequity, more than 80% of investors in the Private Equity
secondary market seek to increase their exposure to this asset class25.
Furthermore, the GPs’ attitude toward secondary transactions carried out in their funds is
carrie out by Preqin26 showed that whereas nearly 63% of GPs
generally positive.. A study carried
have experienced a secondary transaction in their funds, only 25% of them have expressed
concerns regarding these sales.
1.4. The secondary market participants

The three main participants active in the secondary
ndary market are advisers, sellers and buyers.
1.4.1 The advisers

In a secondary market transaction, the seller must employ the services of legal and
financial experts in order to maximise the transaction value and correctly understand the
inherent risks. Furthermore,
rmore, the buyer must employ the services of a legal adviser to analyse
the existing LPA of the fund in which it invests and to draft the Purchase and Sale Agreement
(PSA).
i. The financial advisers27

In July 2010, according to current analysis of existing financial
ancial advisers (see list in
appendix 1.1), there were nearly 50 financial advisers serving the market. According to
25
Fidequity; «Global
Global Private Equity Limited Partner Survey-Q3
Survey 2009»; Q3 2009
26
Preqin; «Private
Private Equity Secondary Market: Short-term
Short boom, long-term growth»;; 2009
27
See appendix 7.13, which includes a summary of the call to Campbell Lutyens (10 March 2010)
Preqin, 47% of currently active financial advisers have entered the market since 200328. This
is a growing sector and it is forecast that new advisers will enter the market in coming years
to exploit new market opportunities, but also to compensate for declines in the main
fundraising activity of many placement agents. However, one must distinguish specialist
advisory firms in the secondary market from brokerage firms which have no advisory
capabilities in structuring and valuation of complex transactions. The three largest advisory
firms in the secondary market that advise on the largest transactions are UBS PFG, Cogent
Partners and Campbell Lutyens. The advisers mainly act on behalf of the seller and they
advise them in numerous ways29.
• Knowledge of the market: the adviser knows the current state of the market and the
preferences of large buyers.
• To structure transactions: the adviser knows the different options for structuring
transaction and their advantages and drawbacks. He can advise on the most appropriate
and then structure it.
• Price orientation: evaluating a price range for the asset, evaluating the fund’s underlying
assets and detailing the valuation method. The adviser knows the current valuations of
the market and has a team capable of modelling the asset price.
• Detailed knowledge of the buyers in the secondary market: adds value in the marketing
strategy, knows the potential buyers and can contact them.
• To manage the process: advises in the selection of the most suitable sale process
(auction, private sale…), provides suitable information, manages the queries, coordinates
legal advisers, receives bids, reviews them and assesses which is the best.
• To close the process: manages the transfer of funds and closes the transaction.
Seeking the service of an adviser is highly advisable when carrying out a secondary market
transaction because it typically achieves the best returns (in the acquisition or sale) and
provides for the efficient management of many complex issues (portfolio analysis, valuation,
legal, terms, etc.)30.
Advisers usually charge a commission that depends on the characteristics of each
transaction (size, unfunded part, complexity) and according to the base used to calculate the
commission (NAV + unfunded; transaction price + unfunded; transaction price). The data
28
Preqin; «The 2009 Preqin Private Equity Secondaries Review»; 2009
29
Dow Jones; «Guide to secondary market intermediaries»; 2009
30
“As a general rule the most successful man in life is the man who has the best information.” – Benjamin
Disraeli
gathered for this analysis indicates commissions are usually between 1% and 3.5% of the
sale amount defined as the NAV + unfunded31.
Table 1: Financial advisers in the secondary market32
Financial advisers (alphabetical order)

Almeida Capital Cogent Partners Patronus Capital
Alpha Associates AG Continental Capital Partners plurisvaluation
Altitude Capital Advisory Credit Suisse Group Preqin
Ariane Capital Partners Fidequity Probitas Partners
Augusta & Co Global Finance Rainmakers Partners
Autumn Capital Partners Greenhill & Co. Richmond Park Partners
Axon Partners Griffin Private Equity Group Rotschild
Axonia Partners Houlihan Lokey Roux Capital
Azla Advisors Lancea Partners Scalar Partners
Bluetower Capital Lazard Secondcap
Boyd & Co Matrix Group Setter Capital
Breslin AG Mercury Capital Advisors Somerset Capital
Campbell Lutyens MHT Partners Secondary Advisors The Camelot Group International
Capital Dynamics Mummert & Company Triago
Capstone Partners Nakatomi Capital UBS Private funds Group
Carta Diem Palomar Corporate Finance
Champlain advisors Park Hill Group
ii. The legal advisers

In a secondary transaction, the legal adviser mainly manages the review of the fund’s
LPA and the drafting of the PSA.
Before a sale the LP must ensure the transaction can be carried out according to the LPA;
that there are no clauses that prevent it, but also according to current tax laws.
Furthermore, the buyer’s legal adviser must analyse the LPA of the fund in which his client
wishes to invest in order to understand how exactly it operates, its management clauses and
compensation and the admission consent.
31
See appendix 7, which summarises the calls to Secondmarket (1 December 2009); Breslin AG (2 December
2009); Pantheon Ventures (9 December 2009); Campbell Lutyens (10 December 2009); UBS PFG (2 February
2010)
32
See list of financial advisers in the secondary market in appendix 1.1. This table contains advisers and
intermediaries
He also advises his client in the drafting of the PSA, in which important clauses such as
contingent conditions, clawback conditions, material adverse change clauses (MAC) or
compensation clauses will have to be negotiated.
All these considerations are crucial to the acquisition/sale process in the secondary market
and may be unfamiliar to the counterparties requiring experts be engaged to analyse these
details to ensure transaction success.
33
Table 2: Legal advisers on the secondary market
Legal advisers (alphabetical order)

Covington & Burling Howard Rice SJberwin
Debevoise & Plimpton Kaye Scholer Weil, Gotshal &Manges
Fried Frank Kirkland & Ellis Wilmer Cutler Pickering Hale and Dorr
Goodwin Procter OR'Melveny & Myers
Few legal firms have a practice dedicated to secondary transactions, however in the case of
direct transactions (acquisition of a direct interest in a portfolio company), legal firms that
advise on mergers and acquisitions transactions are usually hired.
33
See list of legal advisers in the secondary market in appendix 1.2. Only legal firms with a dedicated practice
are included.
1.4.2 The sellers

There are two types of sellers in the market: investors in funds (LPs) and the
managers themselves (GPs).
Figure 12: Breakdown by seller type in the secondary market (2008 vs. 2009)
100% 3.1%
5.4%
90% 6.8% 12.4% Corporate
10.8%
80% 11.3%
Endowment
70% 5.2%
18.9%
60% Family office /
25.8% Foundation
50%
27.0% Pension funds (Public
40%
and private)
30%
Asset manager
20% 42.3%
31.1%
10% Financial institutions
0%
H1 07 to H1 08 H1 08 to H1 09
Source: Author’s own based on data from UBS Private Funds Group; «Adams Street Secondary Networking
Event»; 2010. Breakdown is based on number of transactions brought to market. Asset managers include
Private Equity GPs, fund of funds and hedge funds.
Investors in funds (limited partners) usually represent close to 75% of the number of
transactions and managers (General Partners) the remaining 25% according to data
published by UBS34.
i. The LPs (investors in funds)

Traditionally, financial institutions (banks, pension funds, insurance companies) have
represented between a third to a half of the secondary transactions. Furthermore,
endowments, listed vehicles, foundations, family offices and wealthy individuals act as
sellers in the market35.
34
UBS Private Funds Group; «Adams Street Secondary Networking Event»; 2010. Based on the number of
transactions in the market.
35
Real Deals; «Secondaries roundtable 2009»; 2009
• Banks36: These entities tend to enter and exit the Private Equity market in cycles.
Many of the banks have invested in this asset class to be able to finance leveraged
buyouts (LBOs) and to advise on mergers and acquisitions. In periods of crisis, banks
are incapable of playing their financing role, which compels them to reduce their
exposure to this asset class that has never been a core business. Currently they are
the most important sellers in the secondary market. Recent transactions include the
sale of a $1.9bn Private Equity portfolio of Bank of America to Axa PE in April 2010
and the $1.1bn sale of Citi’s fund-of-funds, mezzanine fund, feeder fund and co-
investment fund interests to Lexington in July 2010. Bank of America was said at the
end of July 2010 to be in talks with Lexington Partners and the sovereign wealth fund
China Investment Corp (CIC) to sell $1.2bn (€930mn) in commitments made to funds
managed by Warburg Pincus according to several people familiar with the
transaction.
• Pension funds: They are large asset owners that invest capital obtained through the
accumulated savings of a group of people in order to make payments to their
stakeholders once they have reached retirement age. Preqin details in a report that
on average these investors seek to allocate 6.2% of their assets to the Private Equity
asset class37. According to a study by the National Association of Pension Funds in the
United Kingdom, pension funds in the United Kingdom have reduced their
percentage allocation to Private Equity from 2.5% on average in June 2008 to 1% in
June 200938. For example, Calpers, the pension fund of the public employees of the
state of California ($237.1 billion AUM) sold more than $2 billion of interests in
Private Equity funds in 2008.
• Insurance companies: These companies offer insurance policies to the public by
direct sale or through other sources such as the employees’ benefit plan. They
manage large sums of money and invest a portion in Private Equity. According to a
study by Preqin, they seek to allocate 3.7% of their assets to the Private Equity39
asset class.
• Listed funds of funds40: These are listed investment vehicles. A true “closed box” (it
has no income apart from the distributions of the fund in which it is invested) until it
issues additional securities. These vehicles employ an over-commitment strategy and
are highly leveraged. In the midst of the financial market crisis, they suffered greatly
36
See appendix 7.4, which summarises the email from Preqin (2 December 2009)
37
Preqin; «2009 Global Private Equity Review»; 2009
38
Web page: http://www.AltAssets.com/private-equity-news/by-pe-sector/buy-out/article/nz17417.html
39
Preqin; «Survey by insurance companies investing in Private Equity»; October 2009
40
from reduction in fund distributions and severely reduced access to credit leading to
increased use of the secondary market.
• Endowments41: These funds seek to cover a part or all the needs of the institutions
to which they belong with the returns on their investment portfolios. According to a
study by Preqin these funds on average seek to allocate 11.8% of their assets to the
Private Equity asset class42. Another “closed box”, these funds have no income and
employ an over-commitment strategy. Accordingly they have had the same problem
as listed funds because of the reduction in fund distributions. The largest are those of
American universities, such as Harvard ($26billion) which has had to access the
secondary market to comply with its liquidity needs.
• Foundations and family offices: Foundations are non-profit organisations that
dedicate their assets to pursuing general aims and family offices are companies that
advise wealthy families. On average, these institutions seek to allocate 11.1% of their
assets to the Private Equity asset class43.
ii. The GPs (fund managers)

The General Partners or fund managers may also be sellers in the market whether it
may be selling a fund interest, a direct interest in a portfolio company, or a part of or all the
portfolio of the fund(s) they manage.
1.4.3 The buyers

Buyers are traditional or non-traditional depending on whether these investors have
capabilities to invest in the secondary market. Traditional buyers are funds dedicated to the
secondary market and funds of funds that invest part of their capital in secondary assets.
The non-traditional are diverse institutional investors: foundations, insurance companies,
endowments, pension funds, family-offices or GPs (fund managers).
According to a survey conducted by Probitas Partners published in November 2009, 50% of
those surveyed (institutional investors) actively purchase direct positions in funds and 10.8%
actively purchase direct positions in companies in the secondary market44.
41
42
Preqin; «Survey by Endowments investing in Private Equity»; October 2009
43
Preqin; «2009 Global Private Equity Review»; 2009
44
II. Characteristics
Figure 13:: Buyer types (by transaction volume - H1 09)
Source: Author’s own based on data from Cogent Partners; «Secondary Pricing analysis Summer 2009»; 2009.
According to a study by Cogent Partners, during the first half of 2009, 57% of the investors
by volume were traditional45.
i. Traditional buyers
According to present analysis of secondary buyers (see in appendix 2), there currently
are 140 buyers with secondary asset acquisition programmes.
• Fund-of-funds: Investment
nvestment vehicles designed to invest in other funds. In order to
diversify their portfolio and accelerate
accelerate returns, these funds usually invest a portion
p of
their capital in the secondary market. The amount these se funds can allocate to secondary
assets (defined in their LPA) has greatly increased over time and is usually about 20%46.
• Dedicated secondary funds:
funds Analysis
nalysis of buyers in the market, the list of which is in
appendix (2.1 and 2.2), indicates a total of 77 companies that have funds dedicated to
investing in the secondary market. These firms manage a total of close to $130 billion
dary market47. According to a study by Preqin, the majority of the
dedicated to the secondary
managers are from the United States (56%) and from Europe (36%)48.
At the end of 2009 the ten largest fund managers dedicated to the secondary market
were as follows:
45
Cogent Partners; «Secondary
Secondary Pricing analysis Summer 2009»;
2009 2009
46
According to the author’s own survey. This percentage is that which they can invest in secondary assets;
however, there is no requirement to invest in secondary assets, it is a possibility
47
See appendix 2.1 and 2.2
48
Table 3: The ten largest dedicated fund managers at the end of 2009
Secondary funds
Rank Name of the Manager managed ($ Billions)
1 Lexington Partners 15.9
Goldman Sachs Private Equity
2 Group 12
3 HarbourVest Partners 10
4 Coller Capital 8.4
5 Credit Suisse Strategic Partners 8.2
6 Landmark Partners 6.7
7 Partners Group 6
8 AlpInvest Partners 5.3
9 AXA Private Equity 5
10 Pantheon Ventures 4.6
TOTAL 82.1
These ten firms manage 64.4% of the dedicated secondary funds.
ii. Non-traditional buyers

According to a study by Cogent Partners, during the first half of 2009 43% of the
investors by volume were non-traditional49.
Non-traditional buyers are considered to be investors that resort opportunistically to the
secondary market. In general, these buyers invest in this asset class in order to diversify their
portfolio or to take advantage of specific opportunities. They usually buy interests in funds
(LP Interest) through straight and opportunistic sales. However, some have investment
programmes dedicated to the secondary market.
49
Cogent Partners; «Secondary Pricing analysis Summer 2009»; 2009
Figure 14: Non-traditional buyer types (H1 09)
GP
9%
Foundation
11%
Pension fund
Endowment
36%
11%
Family Office
16% Insurance
company
17%
Source: Author’s own based on data from Cogent Partners; «Secondary Pricing analysis Summer 2009»; 2009.
1.4.4 Other emerging participants: the private marketplaces

Besides those three groups of main participants, we highlight the ever-growing
presence of private marketplaces. These firms act as intermediaries that bring together
sellers and buyers. On these electronic platforms, interests in funds and direct interests in
private companies can be exchanged. Since they are private these marketplaces are
restricted to Qualified Institutional Buyers (QIBs) by market regulation authorities50. A list of
the main marketplaces for exchanging interests in Private Equity funds is in appendix (1.3).
i. A source of liquidity for limited partners

In these marketplaces, LP interests are transacted between a limited partner (seller)
and a secondary investor. The largest in the segment of LP interest transactions (Private
Equity; Venture Capital, funds of funds and hedge funds) are the firms Secondmarket (c. $2
billion of interests for sale) and Investorflow. According to Mr Bollerman of Secondmarket
(Head of limited partnership interest group) this market segment’s growth is “exceptionally
important”51.
In the USA these marketplaces are deemed Qualified Matching Services (QMS) if they
comply with IRS (Internal Revenue Service) requirements. QMS status gives general partners
the ability to provide additional liquidity to their LPs for trades of their fund interests.
50
51
See appendix 7.2, which summarizes the call to Secondmarket (1 December 2009)
Partnerships that utilize QMS can trade an additional 8% of the total amount of the fund
besides the normal 2% each fiscal year without losing the limited partnership status and
associated fiscal advantages52.
ii. A source of liquidity for the fund managers (GPs)

These marketplaces are also a source of liquidity for fund managers (GPs) of Venture
Capital funds (VC) and Leveraged Buyout funds (LBOs) which can sell their fund interests or
direct company interests thus providing an additional exit strategy. The largest marketplaces
for private company stocks are Secondmarket, NYPPEX, Portal Alliances LLC and SharesPost.
These marketplaces typically charge an intermediation fee by of about 3% of the sale price
(adding other costs if this commission does not cover the fixed costs of the platform)53.
According to Daniel Green of Greenpark Capital, one of the key considerations when using
these platforms is confidentiality of information. In confidentiality clauses of many LPAs the
exchange of interests on this type of platform may not be allowed54. Furthermore regulation
on trading in these private marketplaces and the financial viability of the process will govern
the success of these new market participants.
52
See part 3.3.2: Fiscal considerations
53
See appendix 7.2, which summarises the call to Secondmarket (1 December 2009)
54
AltAssets’ web page: www.AltAssets.com; interview with Daniel Green; (Last accessed: 20/10/2009)
1.5. History
According to Wouter Moerel, a partner at AlpInvest Partners, the secondary market
has grown since its beginning due to two main factors55:
The growth of the primary Private Equity market as the base of the secondary
market.
The systemic shocks which compel investors in Private Equity (LPs) to sell their
investments for various reasons (liquidity, asset allocation, etc.)
Figure 15: History of the Private Equity secondary market
Source: Author’s own using data from: Dow Jones; UBS (Secondary volume 2009); Private Equity Analyst;
Preqin; Chicago Board Option Exchange.
In light of these two reasons and considering historical volume and volatility in the market
(index VIX) we can highlight three major phases of the secondary market.
55
Wharton Knowledge; «Private Equity Secondary Funds: Are They Players or Opportunistic Investors?»; 9
August 2009. http://knowledge.wharton.upenn.edu/ (last accessed: 20 December 2009)
1.5.1 The beginning of the market (1982-2002)

Dayton Carr is considered to be the father of the Private Equity secondary market. He
began in the 1970s managing a Venture Capital fund for the president of IBM, Thomas J.
Watson Jr.. At the end of 1979 American President Carter named Thomas Watson Jr. as
Soviet ambassador. At that time Dayton Carr carried out the first known secondary
transaction by buying the fund that he managed and began to sell the interests. “I realized
that entering in a posterior phase, when financial difficulties begin to soften, and with a
discount, could generate returns of about 60%” stated Dayton Carr56.
In 1982, he founded Venture Capital Fund of America (today VCFA Group), the first
investment firm formed to acquire Private Equity interests in the secondary market. In 1984
the VCFA Group created the first dedicated secondary fund in the USA with investor
commitments of $6 million. Later other pioneers such as Stanley Anfeld, founder of
Landmark Partners (1989), and Jeremy Coller, founder of Coller Capital (1990), helped to
develop the market. According to Mr. Wilson, Managing Director at HarbourVest, Private
Equity at that time was “A desert- you could not trade out.”57.
In the beginning it was a niche market and there was no established secondary market.
There only existed the need to exchange interests in the largest and most popular funds58.
There were some isolated transactions and mainly involved one interest in a fund and
generally between the initial investors. In 1998 Coller Capital launched the first global
secondaries fund.
In the year 2000 Coller Capital and Lexington Partners together led the first secondary
transaction with a value larger than $1 billion by buying the Private Equity portfolio of
NatWest following the bank’s takeover by Royal Bank of Scotland. In 2001 the direct
secondary market expanded with the first significant direct (or synthetic) secondary
transaction led by Coller Capital which bought a portfolio of 27 technology companies from
Lucent Technologies59.
56
Arun Natarajan; Web page: http://www.ventureintelligence.in/blog/2008/01/father-of-pe-secondaires.html;
(last accessed; 31 December 2009)
57
BVCA, Arshi Thind; «BVCA Research note: The Private Equity Secondary Market»; 2009
58
Sam Scherwin, Dan Burstein; «Inside the Growing Secondary Market for Venture Capital Assets»; 2007
59
Coller Capital’s web page; http://www.collercapital.com/assets/html/about_coller/coller_secondaries.html;
(last accessed: 5 January 2010)
Figure 16: The beginning of the market (1982-2002)
From the beginning of the market until 2002 the main market driver was growth of the
primary market and only $15 billion was exchanged in the secondary market. It was still a
“cottage industry” 60.
1.5.2 The growth of the market (2003-2007)

At the beginning of this period the market expanded as a result of the systemic
shocks from 2000 to 2001 in which the technology bubble burst and attacks on the twin
towers took place. Investors began to seek an early exit of their unpaid commitments to
Private Equity and in particular to Venture Capital.
During this period many of the large financial institutions (Deutsche Bank, UBS AG, Abbey
National, Bank One, Merrill Lynch, Dresdner Bank, JP Morgan, Bank of America) began selling
large portfolios of interests in Private Equity funds and interests in “pay-to-play” funds used
as a mean to obtain lucrative leveraged finance or merger and acquisition mandates but that
generated losses in the banks’ accounts.
Moreover, growth in the primary market due a period of economic expansion was the main
growth driver of the secondary market. New investors in this asset class were accessing the
secondary market to create portfolios and relationships with GPs61.
During this period the secondary market evolved becoming more efficient and replacing a
market characterised by limited liquidity and highly discounted prices. For the first time in
the history of the Private Equity secondary market assets were exchanged at their net asset
60
Coller Capital’s web page; http://www.collercapital.com/assets/html/about_coller/coller_secondaries.html;
(last accessed: 5 January 2010)
61
Greenpark Capital; «With debt market tightening, what is the likely impact on the primary PE / secondaries
market?»; 2007
value (NAV) or even at a premium (called “secondary bubble” due to the intense
competition for quality assets62) and liquidity greatly increased. Reflecting the increased
issuance in the primary market the secondary market became a portfolio management tool.
This period witnessed a niche market evolve into an active market with broad supply and the
appearance of many specialist participants (buyers or advisers).
1.5.3 The credit crunch (July 2007-2009)
i. The crisis: growth driver in the secondary

Marleen Groen of Greenpark Capital classifies the secondary market as a
“countercyclical”63 market. Since 2007 when the American real estate market collapsed a
new market environment has emerged. The financial crisis that was unleashed and the
infamous “credit crunch” with its disastrous consequences in the real economy have been
catalysts to growth of the secondary market.
The increasing cost of financing of highly leveraged portfolio companies has put the future of
double digit Private Equity returns in doubt. When the financing tap is turned off, the cost of
financing increases and the value of investments64 falls. Opportunities to exit and refinance
investments are severely diminished. At the same time that operational risk is increasing the
financial risk (above all for the LBOs) of Private Equity investments rises; sometimes
dramatically. Funds that invested in 2006-2007 (the maximum in the market) purchased at
high valuation levels and now face many difficulties due to a high level of leverage. Guy Hand
who heads Terra Firma Capital Partners, a large Private Equity investment firm in London,
said during a conference in November 2008 that returns on the trillion dollars invested at
the height of the Private Equity boom in 2006-2007 will be “negative, very negative”65. Many
investors began to reduce their exposure to this asset class by seeking another risk/return
trade-off and this benefited the secondary market. Furthermore, active portfolio
management, the denominator effect, and the lack of liquidity helped push the secondary
market upwards.
Moreover, listed Private Equity funds have suffered from the reduction fund distributions
and financing restrictions. Without access to new financing they have had to sell assets by
resorting to the secondary market66.
62
Greenpark Capital; «With debt market tightening, what is the likely impact on the primary PE / secondaries
market?»; 2007
63
Catherine Craig, Private Equity news; «Contrarian Secondaries firms harvest golden opportunities»; 11/02/08
64
If the discount rate (WACC) of the cash flows increases, the value of the asset falls mechanically
65
Kosman Josh; «The buyout of America» p 129; Penguin; 2009
66
Goldman Sachs Asset Management; «Observations on the Private Equity Secondary Market»; 2009
And finally, financial institutions, some wounded severely during the crisis, have been
growth catalysts in the secondary market. The large bankruptcies and rescues such as those
of Lehman Brothers, Bear Stearns, Merrill Lynch, Citigroup, ABN Amro, Lloyds, HBOS, RBS or
AIG have been a source of acquisition opportunities in the market through the sale of non-
strategic assets such as Private Equity portfolios. Furthermore, the Basel II Accords multiplies
by approximately 2 to 3 the cost to banks of investing in Private Equity67 providing added
impetus for secondary sales.
Figure 17: Changes to LPs’ exposure to secondary funds over the years 2008-2009
Not
committed
to Increased
secondary 34%
funds…
Decreased
4%
No change
33%
Source: Author’s own based on data from Coller Capital; «Global Private Equity Barometer - Winter 2009-
2010»; 2009.
ii. Falling valuation: a buyers’ market

During this period asset valuations have been driven down due impairment of
company fundamentals and valuation multiple contraction but also from the imbalance
between the abundant offers (due to “distressed sellers”) and reduced demand from
investors in the secondary market.
Indeed, according to David Wachter, Managing Director of W Capital Partners, as much as
$200 billion of Private Equity commitments will be offered in the secondary market in the
period 2010-201168 or approximately $100 billion annually. The demand that can be
quantified by existing “dry powder” is only about $40 billion69 (for active buyers: secondary
funds, funds of funds and other investors with programmes dedicated to the secondary
market) at the beginning of 2009. This supply demand imbalance of close to $60 billion will
create a buyers’ market in which asset valuations fall.
67
Greenpark Capital; «Impact of the credit crunch on the secondaries market»; 2008
See section II, part 4.2.2. i. Basel II
68
Dow Jones; «Guide to Secondary Market Buyers»; 2009
69
According to a survey by UBS at the beginning of 2009. UBS PFG; «Secondary capabilities pitchbook»;
October 2009
II. Characteristics
In 2008 and 2009 sellers accepted large discounts to net asset value (NAV) of sold assets.
The NAV of their investments refers to the last value published by the GP (published each
ea
quarter). Due to valuation reductions from one quarter to another (due to the fall in the
value of portfolio companies) and their urgent need for liquidity, sellers were forced to
accept high discounts.
iii. The lack of visibility prevents carrying out the

t
transactions: the bid-offer spread
Uncertainty regarding the economic outlook causes investors to be very selective
regarding the quality of assets they buy and the pace of transactions subsequently fell.
fell In
some cases buyers that signed a sale agreement withdrew w by exercising the Material
Adverse Change clause (MAC) abandoning a transaction agreed a few months earlier71.
70
To
o compensate for risk incurred by this lack of economic visibility return requirements on
their investments increases and higher
high discounts to NAV are offered. Sellers
ellers that have higher
price expectations do not agree and due to the wider bid/offer spread transactions are not
carried out as demonstrated by a study undertaken by Triago indicating that 86% of
transactions in 2008 were not carried out due to low valuations.
Figure 18:: Proportion of investors who ruled out transactions in 2008 because of pricing concerns
14%
Yes
No
86%
Source: Author’s own based on data from Triago; «The Secondary Seller's Options»; 2009.
iv. The market is perfected

During the credit crunch, the Private Equity secondary market is perfected. Many
investors in Private Equity now access the market increasingly making structured
transactions or direct (synthetic) transactions of entire portfolios. The specialist participants
such as advisers have developed
develop new strategies to create value by means of complex
structured transactions.
70
See legal considerations, material adverse change clause
71
Private Equity Online; «MAC
MAC uncertainty grips sellers in secondary market»;
market 03/11/08
2. The transactions on the market: Description of the

different structures and sale processes
2.1. Different types of transactions

In the market transactions are classified into two groups according to the type of
transferred asset; the sale of limited partnership interests and the sale of direct interests.
Figure 19: Two types of secondary transactions: sale of limited partnership interest and direct sale
2.1.1 Sale of limited partnership interests

This type of transaction occurs when an investor in a fund (LP) is willing to sell his
interest or a portfolio of interests to another investor that becomes the new LP. The
distinguishing feature of this type of transaction is that the buyer purchases the funded part
of the fund but also commits to assume the unfunded commitments that the interest
entails.
2.1.2 Direct sale

Previously called synthetic sales, these transactions occur with the sale of a portfolio
company directly by a Private Equity fund to another Private Equity fund. The object of the
sale may be part or all of the interest in a company or in a portfolio of companies directly
held by a fund. The sale can be carried out by creating a special purpose vehicle which will
buy the companies or interests in the companies and use a new manager (GP) hired to
II. Characteristics
manage and ultimately sell the vehicle’s assets72. A sale can also be accomplished by
acquiring the assets with a vehicle managed by specialised direct sales managers.
A GP may also create an annex fund that takes ownership in companies of the other fund. In
times of crisis underlying companies may need additional investment
nvestment but the GPs may not
have the fund resources to back follow-on
follow on investments. Therefore many create annex funds
that invest in the portfolio companies with preferred conditions of returns (1.5 to 2 times
the initial investment) and management fees (low
(low management fees and carried interest).
If the GP wants to sell direct company interests out of funds managed there are different
sales structures that can be adapted to the manager’s needs.
According to UBS the sales of limited partnership interests, by transaction volume, usually
represent close to two thirds of the total transactions while direct transactions represent the
other third. However, in 2009, direct transactions only represented 15% of total
transactions73.
Figure 20:: Transaction volume breakdown – (Limited partnership interest and Direct sale) (2007 to
2009)
Source: Author’s own based on UBS data; «Adams Street Secondary Networking Event»; 2010.
2.2. Different sale structures

There exist different structures that allow finding liquidity for an interest or a
portfolio of interests in companies or funds.
72
Wharton Knowledge; «Private
Private Equity Secondary Funds: Are They Players or
or Opportunistic Investors?»; 9
73
UBS Private Funds Group; «Adams Street Secondary Networking Event»;
Event»; 10 February 2010
Figure 21: Different sale structures in the secondary market
All the structures from the table above can be applied to each type of transaction: sale of a
limited partnership interest or direct sale. The exception is securitisation of the unfunded
which is a structure that can only be applied to the sale of a limited partnership interest
given that it is the only type of transaction that would entail an unfunded commitment.
Figure 22: Comparison of the characteristics of the different sale structures
As can be seen in the table above each sales structure depends on the type of asset sold and
on the objectives and concerns of the different parties. The structures presented in the table
demonstrate there are various options available to satisfy a seller’s requirements.
2.2.1 Straight sale

This sale structure is the most common and widely used. It consists of the straight
sale of an interest or of a portfolio of interests in portfolio companies or funds. In the case of
a sale of a limited partnership interest the seller sells all his interest to the buyer who pays
for the funded part of the fund and commits to assume the unfunded commitments that the
fund’s interest entails. In a direct sale the buyer acquires the entire portfolio company.
Figure 23: Traditional sale structure: straight sale of a limited partnership interest
2.2.2 Strip Sale74

In this structure, the buyer purchases a part of the interest of a fund in one, some or
all the interests of the manager (funds or companies). The buyer selects the funds or
companies in which he wishes to invest and buys part of the interest of the fund in these.
This structure is usually used more for direct sales transactions (of portfolio companies) in
order to generate valuable liquidity to back the manager’s investments in a much less
dilutive manner than by means of an annex fund with preferred return.
However, it can also be accomplished through the sale of limited partnership interests. With
this structure, the manager of the limited partnership interests may reduce his overall
exposure while maintaining close relationships with the underlying fund managers75.
2.2.3 Stapled Secondary

In this structure, the buyer acquires an interest or a portfolio of interests in portfolio
companies or funds combined with an investment commitment in a new fund managed by
the seller. This structure, imposed by the GPs, allows them to facilitate their next
fundraising. This type of transaction also requires the secondary buyer to have the capacity
to fund primary investments.
This transaction structure was very popular in the years 2006-2007 but is infrequently used
in the current environment due to existing supply/demand imbalances in the market.
74
Probitas; «Second thoughts newsletter»; 2009
75
Campbell Lutyens; «The Private Equity Secondaries market: a complete guide to its structure transaction and
performance»; PEIbooks, 2008
Figure 24: Structure of a stapled secondary sale of a portfolio of limited partnership interests
2.2.4 Structured secondary sale76

These structures are innovative and becoming more frequent since they allow sellers
to achieve much more attractive prices than in a traditional transaction. Additionally they
allow carrying out large transactions by offering downside protection. They vary from one
transaction to another but as a general rule the seller establishes a special purpose vehicle
(SPV) with a company specialising in the secondary market (the buyer) to create a single
legal and financial framework that fulfils seller objectives. The vehicle, typically financed by
the buyer, acquires the assets of the seller, who in exchange receives the proceeds of the
sale in cash and an interest in the capital of the new entity.
In order to successfully execute a structured transaction, the seller must determine his most
important objectives– sale price, liquidity, relief of future capital calls, administrative burden
– and suitably structure the variables of the transaction taking into account legal, tax77,
accounting, administrative and regulatory considerations. It is therefore very advisable to
work with an experienced adviser on these structures.
Each structure is tailor-made according to the asset and the objectives and concerns of the
different parties. Therefore, each is unique but some important common variables stand
out.
Agreement on the shareout of cash flows:
In several structured transactions a cash flow shareout agreement is defined which governs
all future capital calls and distributions of the assets that belong to the NewCo78. Depending
76
See appendix 7.1, which summarises the call to UBS (26 November 2009)
77
The investor may have the chance to use the losses as a tax shield
78
UBS Private Funds Group; «Private Equity Secondary Market Review»; 2009
on the seller’s objectives - liquidity, reduction of risks, relief from capital calls, etc. - the
terms can be highly specific to each structure.
Figure 25: Structured joint-venture sale of a portfolio of limited partnership interests
Source: Adapted from UBS Private Funds Group; «Private Equity Secondary Market Review»; 2009.
For example, if a seller cannot assume large capital calls, the buyer may finance it. In
exchange the buyer receives all the distributions up to 100% of the capital invested. Then,
depending on the asset and the terms of the transaction, he receives the vast majority of the
distributions (between 80% and 90%) until reaching a preferred return of between 1.5 to 2
times his investment. When this return has been exceeded, the distributions change with
the LP receiving the majority of the distributions (between 70% and 90%)79.
Seller financing or financing by a third party80:
When structuring a transaction the financing variable is crucial. In order to finance the asset
acquisition, the buyer may request financing in order to leverage the acquisition, lower its
financing cost and obtain some downside protection. Besides the loan, he may request a
credit line in order to finance any imbalance that may appear between the capital calls and
distributions.
79
Dow Jones; «Guide to secondary market Intermediaries»; 2009
80
See appendix 7.1, which summarises the call to UBS (26 November 2009)
He may request this financing from a third party or, since credit availability is currently
restricted, from the seller.
2.2.5 Total return Swaps81

These are derivatives contracts designed to swap the cash flows between two
parties. In this structure, a floating interest rate is swapped for all the cash flows of a
portfolio of interests in funds or in companies. The protection buyer keeps the asset but
exchanges the cash flows from the asset (capital calls, follow-on, dividends and distributions)
for a variable interest determined as benchmark + spread. The protection seller receives the
cash flows of the asset but assumes the risk of valuation fluctuations (capital gain and loss).
This derivative contract seeks to transfer the credit and market risk of the underlying asset
to another party that seeks exposure to this asset. It changes the nature of the asset on each
party’s balance sheet but it does not remove it from the balance sheet of the counterparty
seeking to reduce risk.
Figure 26: Total return swaps for a portfolio of limited partnership interests
Source: Author’s own using data from Probitas Partners; «Routes to liquidity»; 2009.
Advantages:
Maximises the asset price
Rapid execution (it does not need the GP’s approval)
Drawbacks:
It does not remove the asset from the “seller’s” balance sheet and does not
generate liquidity upfront (there is no initial payment)
The contract entails the creation of counterparty risk.
81
Kelly DePonte; Probitas Partners; «Routes to liquidity»; 2009
2.2.6 Securitisation: CFOs

In this structure the buyer acquires the assets via a SPV and later refinances the
acquisition by issuing CFOs (Collateralised Fund Obligations). This structure divides the cash
flows of the asset into strips or tranches that have different payment priorities and different
risk/return profiles82.
Figure 27: Securitisation by means of CFOs
Source: Adapted from Probitas Partners; «Routes to liquidity»; 2009.
2.2.7 Securitisation of the unfunded83

This structure, which can only be used in the sale of limited partnership interests,
divides the interests between the funded and the unfunded commitments. The LP keeps his
funded interest but the unfunded is securitised and sold off. The secondary investor buys
these new securities by creating a special purpose vehicle of which he can become the
manager.
Figure 28: Securitisation of the unfunded
82
Kelly DePonte; Probitas Partners; «Routes to liquidity»; 2009
83
Private Equity Analyst; «Secondary firms cook up new ways to close deals»; 2009
NYPPEX has also developed a certain type of derivative contract called NYPPEX GICCO
(Guaranteed Capital Call Obligation) that acts as insurance. An LP that does not wish to
finance its unfunded commitment can buy a GICCO protection for a defined period of time.
This contract transfers the financing obligation (the unfunded commitments) to the buyer of
the contract who, should the GP make a capital call during the period of the contract,
provides capital funding and in exchange receives a preferred return on the distributions of
about 1.5 to 2.0 times the investment made. For this transaction NYPPEX charges a
commission of close to 2.5% of the unfunded and mostly to the buyer.
This structure developed by Probitas and NYPPEX is very innovative but has not yet been
implemented.
2.2.8 Spin-out
The term spin-out is used in the Private Equity secondary market when the buyer
acquires an entire portfolio of captive assets. Generally buyers are the previous fund
managers alongside a secondary investment firm. The most famous example of this type of
transaction is that of MidOcean Partners which acquired alongside AlpInvest in 2003 the
portfolio of assets that their managers previously managed in Deutsche Bank for €1.3 billion.
One of the most recent is that of the Venture Capital group of Lehman Brothers (Lehman
Brothers Venture Partners) whose management team and HarbourVest bought in January
2009 for an undisclosed amount84 and called the new entity Tenaya Capital. The secondary
investor may or may not include the management team in the transaction.
This sale structure is usually accompanied by a stapled secondary given that the fund
managers wish to secure interests in subsequent funds in order to continue their investment
activity85.
2.2.9 Tail-end
This sale structure refers to the sale of the remaining assets in a fund that is
approaching or has exceeded its expected life. In this type of transaction the GP seeks to sell
the remaining assets of the fund by means of an accelerated traditional sale that preserves
the IRR already achieved by the fund.
84
Harbourvest press release: http://www.harbourvest.com/news_and_events/pressreleases/1029.htm; last
accessed: 10 January 2010
85
Campbell Lutyens; «The Private Equity Secondaries market: a complete guide to its structure transaction and
performance»; PEIbooks, 2008
2.3. The different sale processes86

When selling one or more interests in a fund or funds, or selling a part or all of one or
more portfolio companies, there are different options for accessing the secondary market.
Figure 29: Comparison of the characteristics of the different sale processes
Source: Author’s own; data from Triago; «The secondary seller’s options»; 2009 and Clark, Geoffrey, and
Christopher Kojima; «Opportunities and challenges in Secondaries» Goldman Sachs in The Journal of
Alternative Investment, 74-86; 2003.
2.3.1 GP option: arrange a sale through the manager

This process is only applicable to the sale of limited partnership interests. The LP
contacts the GP to discuss his intention to sell the interest and seeks the manager’s
assistance in finding a buyer. The GP has no obligation to assist the seller in the sale but
usually accepts because in this way he can control who is going to be his new LP after the
sale. Generally the manager attempts to sell to the existing LPs of the fund (or of another of
the manager’s funds) or to other outside “friendly” investors.
The limited competition in this process makes it uncertain that the LP will achieve the best
price for his interest.
2.3.2 Exclusive sale with a secondary buyer

The seller (LP or GP) decides to negotiate with a single potential buyer. This exclusive
process is usually carried out with a buyer with whom the seller already has a good
relationship. It allows the buyer to obtain more information, meet the seller, understand the
reasons for selling, and potentially offer better pricing and a tailored transaction. However,
due to the absence of other alternatives, execution risk is high.
86
Triago; «The secondary seller’s options»; 2009
2.3.3 Open auction

In this process the potential seller organises and manages an auction which is open to
many potential buyers. The selection of the potential buyers is therefore a critical step.
Furthermore, the seller must manage the flow of information efficiently to ensure that the
process is competitive. A typical auction is carried out in two rounds. In the second round
(the short list) two or three buyers are selected to submit binding bids.
Although this process lacks confidentiality and can be very intense, it allows the seller to
receive many bids and make an informed decision on pricing. However, for confidentiality
reasons, it may not be used in a direct sale.
2.3.4 Targeted auction

This process, although very similar to the open auction, has two notable differences:
It is managed by a secondary adviser
The name of the seller is unknown to the potential buyers
In this process the secondary adviser targets the auction to a group of selected potential
buyers and in this way increases the chance of maximising the asset price. Furthermore,
confidentiality and anonymity allows the seller cancel the asset sale (if he does not like the
transaction terms) without the market or GP realising the identity of the seller.
2.4. The execution of the transaction

A typical sale process in the secondary market lasts between two weeks87 and three
months and advances through the following stages88:
Analysis of the assets being sold according to the buyers’ returns expectations.
Verification of the portfolio according to the buyer’s investment criteria89.
Verification of the LPA conditions and of the transferability of the assets.
Choice of the sale structure and of a suitable process: GP option, exclusivity,
limited or public auction.
Preparation of due diligence documents and of the transaction: syndication, joint
venture, etc.
87
Web page Financial Planning; «Private Equity gets liquid»; www.financial-planning.com; 2009
88
Carta Diem; «Private Equity Solutions»; 2005
Triago; «The secondary seller’s options»; 2009
89
Moreno-Barberá Participaciones Financieras; «El Mercado secundario de capital riesgo»; January 2006
The process of due diligence in a secondary transaction is crucial to be able to

evaluate the quality of the fund’s underlying assets, the quality of the GPs, the
existing agreements and to determine a suitable price.
Selection of the bidder through different secondary buyers in the market.
Obtaining GP consent for the transaction.
Assistance and coordination with legal advisers and drafting of contracts.
Finalising the documents and negotiations.
Closing of the transaction: signing the contract, payment of the final price and
change of ownership of the assets.
3. Legal and tax considerations

A Private Equity fund entails many legal and tax considerations flowing from the
limited partnership agreement (LPA) which relate to the transferability of the asset. For this
reason, when buying or selling limited partnership interests in the secondary market, it may
be necessary to review all legal documentation prior to a transaction.
3.1. Legal considerations in the revision of the LPA

The LPA or formation agreement of a fund describes the structure and characteristics
of the fund and governs the relationship between the LPs and the GP. It contains the
different rights and obligations of the respective parties and the different operating
conditions of the fund. Additionally, there may be side letters or other such separate
agreements which can clarify or modify terms of the LPA. For this reason, when selling an
interest it is essential to obtain all legal documentation prior to the transaction.
3.1.1 The Consent of the GP90

LPAs generally require the consent of the GP in order to exchange a limited
partnership interest. In some cases the GP cannot reject a transaction as long as it does not
violate LPA terms but in others consent is left to the GP’s discretion.
Usually, the GP does not exercise its veto right given that a secondary sale typically reduces
the default risk of its LPs91. According to a survey by Preqin published in 2009, 94% of
managers say that they have never used their right to veto a secondary sale92.
90
Wilmer Cutler Pickering Hale and Dorr LLP; «Trends in the Private Equity Secondary Market»; 2009
91
See appendix 7.10, which summarizes the meeting with SJberwin (14 December 2009)
92
3.1.2 Pre-emption rights: Right of First Refusal (ROFR)

In some funds (for example those of Blackstone) the LPA contains a right of first
refusal clause. When an LP sells their interest, these clauses oblige the LP to first offer the
interest to the existing LPs in the fund on the same terms as those agreed with the potential
buyer. If this requirement exists, it must be honoured unless the GP waives it (the GP can
waive this clause).
Furthermore, in the case of a direct sale (interest in a company) there may be shareholder
syndication agreements with pre-emption rights. If so, they too must be honoured unless
shareholders waive them. This clause may delay the closing of the transaction.
3.1.3 Legal reporting requirements

In the case of a secondary transaction some LPAs require that a legal opinion
regarding the transfer be rendered to certify the transaction will not contravene a securities
law or tax laws. In practice it is very rare for the GP or his legal counsel to request it93.
3.1.4 Sale notification requirements

The LPA may require prior notification of the sale within a certain time period. In any
case, in order to finalize the sale, the new and previous LP will have to notify the GP of the
transfer. The new LP will have to comply with the GP’s information requirements and
provide necessary information to complete different documents.
3.1.5 Payment of costs incurred by the transaction

The GP may ask the buyer and selling limited partner to pay the costs incurred by the
transaction which is generally limited to the legal fees associated with the Transfer
Agreements. This fee is generally split between the buyer and seller.
3.2. Legal considerations in the negotiation of the Purchase

and Sale Agreement
Once the buyer and the seller agree on price both parties sign a Purchase and Sale
Agreement (PSA). This contractual document specifies the price, subject assets, closing date,
representations and future commitments. Besides the price and subject assets this contract
includes key legal terms of the transaction.
93
VCFA group; «Secondary sales of Private Equity interests»; 2002
3.2.1 The contingent conditions94

These conditions are those that if not fulfilled cancel the agreed contract. They may
be divided into two sections: conditions precedent or those acts that need to happen before
the contract closes, and conditions subsequent or those acts that need to happen after the
contract closes. In a secondary transaction, the normal contingent conditions are the
following:
Consent of the fund general partner to the transfer
Satisfaction or waiver of any rights of first refusal
Waiver of penalties regarding any defaults by the seller (such as a late capital call
payment)
3.2.2 Material Adverse Change clauses95

These clauses allow a buyer to withdraw from a transaction if the fund (mainly
portfolio companies) undergoes substantial changes between the signing and the closing of
the transaction. These clauses can vary from broad coverage to more specific points such as
the resignation of a key manager.
3.2.3 Clawback provisions96

Clawback clauses are provisions included in the LPA that require LPs to refund
distributions due to special conditions. In the PSA it is essential to indicate that if these
clauses are exercised the seller will compensate the buyer by refunding distributions made
prior to the cutoff date.
The parties can also agree on a mechanism to calculate the liability for a clawback of funds
that are not attributable to a particular distribution according to a pro rata share of the
distributions received. The caps in these refund requirements are often heavily negotiated.
3.2.4 Threshold funds97

In a transaction involving a portfolio of fund interests, threshold funds may be
identified. These are funds that must be transferred before having to buy any other funds in
the portfolio. It enables the buyer to acquire only the funds he is focusing on without being
forced to buy less attractive interests.
94
VCFA group; «Secondary sales of Private Equity interests»; 2002
95
Kaye Scholer LLP; «Key legal and transactional issues in secondary Private Equity fund transaction»; 2009
96
97
When sellers are distressed they may use thresholds in an attempt to obligate buyers
to purchase less attractive assets when acquiring an interest in a high-quality fund.
3.2.5 Indemnifications98
General partners request indemnifications for breaches of covenants,
representations, and warranties in the sale agreement. Buyers and sellers seek to limit these
indemnification requirements. However the seller and the buyer have little room to
negotiate with the GP given that the same must consent to the transaction.
3.2.6 Joint liability: French legal framework99

In France the law considers the seller jointly liable with the buyer for capital calls of
the transacted fund interest (in an FCPR) during the two years after the transaction. This
legal provision requires the parties to reach an agreement on this particular issue when
drafting the PSA.
3.2.7 Stapled transaction clauses100

This clause obliges the buyer to commit to invest in a new fund managed by the same
GP in order to obtain the GP consent of the secondary transaction. Although more popular in
2006-2007 it has become less common today due to the supply/demand imbalance in the
market.
3.3. Tax considerations101

Besides the LPA, each secondary sale must comply with the taxation regime of the
country for which it is considered resident. The parties must determine the sale does not
alter the fund’s tax status or its exemption from registration requirements.
3.3.1 Taxation of Private Equity funds

In most jurisdictions, Private equity funds (PEF) are subject to favourable regulatory
treatment that exempts them from paying tax on dividends received from portfolio
companies or capital gains generated from the sale of companies (elimination of the entity-
level tax). Typically capital gains and losses and net operating income or loss is taxed in the
hands of the LP.
98
99
Private Equity magazine; «L’envol du secondaire»; August 2008
100
101
Dow Jones; «Guide to secondary market buyers»; 2009
3.3.2 The United States: the 2% law102

In the USA, under IRS regulation (section 1.7704), no more than 2% of a private
partnership’s capital commitment can be transferred each fiscal year without the
partnership being considered to be publicly traded. Should this rule be broken the
partnership will be deemed a corporation thus losing the benefits of a flow through entity.
i. The Qualified Matching Service

Transactions in a fund can only be carried out between qualified investors and limited
partner transfers may only occur among 2% of the fund’s capital commitment unless they
occur via a Qualified Matching Service (QMS). A Qualified Matching Service is approved by
the tax authorities and allows exchanging an additional 8% of the fund’s capital
commitment. A QMS provides management services for a secondary transaction.
In consenting to a transfer, the GP will make sure it complies with tax laws in order to
protect the fund’s fiscal status. For this reason an LP, before initiating a sale of interests,
must verify the volume of transferred interests in the fiscal year to ensure that it complies
with regulation and that the transaction can take place.
ii. Block transaction

A fund may allow a transaction of more than 2% of the fund’s capital commitment if
the transferred interest represents more than 2% thereof.
Other exemptions to this 2% law are applied in some specific cases, such as in the sale of an
interest due to the death of its owner or between family members.
4. The future of the market
4.1. Empirical demonstration: The primary market drives the

secondary
As mentioned in 1.1.3, there seems to be a mathematical relationship between funds
raised in the primary market and transaction volume in the secondary market. In order to
produce future growth predictions, the author has developed a model to identify the
relationship between the two markets.
102
4.1.1 Secondary market projections model103

The model is based on an analysis of historical data between 1995 and 2009
(globally). The analysis focuses on primary fundraising and on transaction volume in the
secondary market. Analysis of these data and the projections model are available in
appendices (8 and 9).
The model analyses the historical relationship between primary fundraising volume and
transaction volume in the secondary market in order to determine a correlation that allows
future estimates to be made.
In order to identify a relationship between the secondary and primary market, primary
commitments most likely to be transacted on the secondary market were determined. The
commitments most likely to be sold are those between three and seven years old being the
most often exchanged in the secondary market. It was assumed that transactions will take
place over the life of the fund with the following probability distribution.
Table 4: Distribution of the transaction probabilities during the life of a fund
Year of the 1 2 3 4 5 6 7 8 9 10 Total

fund
Probability 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 100%
Year average 0.0 0.1 0.3 0.8 1.5 1.2 0.7 0.4 0.0 0.0 5.0
This distribution hypothesis is designed to target an average fund age of 5-years. This
average transaction age of a fund is justified by historical averages that have fallen over time
(they were previously above 5 years; today they are closer to 4.5 years).
By multiplying the probability percentage by funds raised in the primary market in the
corresponding years, the potential volume of primary commitments that are likely to be sold
in the secondary market can be deduced. This potential transaction volume will be called the
secondary base.
103
Model available in appendix 9. Based on a study by Cogent Partners: «Secondary market model projections»
(2006) and a study by Alex Sao-Wei Lee: «Private Equity secondary funds and their competitive strategies»
(2003)
II. Characteristics
4.1.2 Historical relationship

relationship between the secondary base and the
volume in the secondary market
Upon comparing the historical data of the secondary base with the secondary
transaction volume between 1995 and 2009, two trends stand out:
From 1995 to 2002, an average of 3.4% of the secondary base was exchanged in
the secondary market.
From 2003 to 2009, the last relationship was not maintained; an average of 6.4%
of the secondary base was exchanged.
Since 2009 was an atypical year, the mathematical relationship was not maintained
maintaine due to
the crisis in the financial markets that prevented the natural turnover of primary assets
towards the secondary market.
market. For this reason it is also interesting to analyze
analy the period
2003-2008
2008 in which 7.2% of the secondary base was exchanged in the secondary market.
4.1.3 Secondary market transaction volume: 2010-2014E

2010
In order to be able to estimate volumes within the next five years, it was assumed
that volume raised in the primary market will remain constant after 2009; that is between
2010 and 2013 thee primary fundraising volume will be the same as in 2009. Since 2009 was a
tough year for primary fundraising in Private Equity, it is a conservative hypothesis that
allows factoring the possible decline in investment by financial institutions in Private Equity
E
due to new regulations (Basel II, “Volcker Rule”). Based on this fundraising data, the
secondary base is calculated.
Figure 30: Secondary base (in bn$)
400
350
300
250
200
150
100
50
0
2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E

The present downside case assumes a historical turnover rate for the period 1995 to
2009 of 5.6%. This hypothesis is very conservative given that it does not take into account
the new dynamic of the secondary market. It estimates a compound annual growth rate
(CAGR) of 13% in volumes transacted in the secondary market which translates to an
average of $17.5 billion per annum in the next five years.
The base case uses the most recent trend from 2003 to 2009 in which 6.4% of the
secondary base was exchanged in the secondary market. If this trend is confirmed, it is
forecast the market will represent an average of $20 billion per annum during the next five
years. This assumption which represents the base or most realistic case estimates a
compound annual growth rate (CAGR) of 16% in the volumes exchanged on the secondary
market.
The present upside case uses the turnover rate of the assets for the period 2003-
2008. Taking this hypothesis of a 7.2% turnover rate allows taking into account the different
future growth catalysts that have appeared mainly due to the crisis effects (denominator
effect, financial pressure on investors due to a fall in distributions, and acceleration of capital
calls) and the new regulations in force (Basel II, “Volcker Rule”). According to this scenario,
the market will grow 19% per annum (CAGR) and will represent an average of $22.5 billion
per annum of secondary transactions during the next five years.
Figure 31: Estimates of the secondary market transaction volume according to the historical
relationship ($ billions)
30
25
Downside
case (5.6%)
20
Base case
(6.4%)
15
Upside case
10 (7.2%)
Secondary
5
transaction
volume
0
2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
Source: Author’s own using data from: Dow Jones; «Guide to Secondary Market Buyers»; 2009 (1996-2008)/
UBS Private Funds Group; «Adams Street Secondary Networking Event»; 2010 (2009)/ Author’s own
projections.
This historical relationship is used by different market participants to estimate secondary

dealflow potential. This relationship relies on the main driver of the secondary market: the
natural turnover of primary assets in the secondary market due to portfolio management,
changes in investment strategy, and need for liquidity.
However, it must be noted that although these projections are based on the existing
relationship of historical data, the model is somewhat limited due to the uncertainty of the
historical data.
In conclusion, this model demonstrates that the primary market has been the historical
driver of the secondary market. This verified relationship allows us to estimate that the
secondary market should witness an average transaction value of between $17.5 and $22.5
billion per annum over the next five years (2010-2014)104.
4.2. Future growth catalysts

As stated, due to the historical relationship and the large volumes raised in the
primary market in the last few years, if the historical relationship is maintained it is forecast
that market transactions will represent an average of between $17.5 and $22.5 billion per
annum during the next five years. But what will be the main catalysts of this growth in the
secondary market?
4.2.1 The “denominator effect”

Since public market valuations fell, the percentage of other assets in portfolios
including Private Equity funds has increased on a relative basis exceeding the asset allocation
constraints of many institutional investors. This phenomenon, known as the “denominator
effect”, has forced many investors to restructure their portfolios leading to the potential for
sale of LP interests105.
According to a survey by Fidequity, at the end of the third quarter of 2009 20% of investors
in Private Equity (except secondary funds and fund-of-funds) were overexposed to the asset
class and may lead to an increase in secondary market opportunities106.
According to a survey by Coller Capital, at the end of 2010 31% of American investors and
15% of European investors forecast having Private Equity commitments higher than their
allocation targets107.
104
Using the estimates of the downside and upside cases of the projections model.
105
Ari Nathanson, Reuters; «LPs rush for exits, overwhelming secondary market»; 15 December 2008,
www.reuters.com (Last accessed: 6 November 2009)
106
Fidequity; «Global Private Equity LP survey – Q3 2009»; 2009
107
Coller Capital; «Global Private Equity Barometer - Winter 2009»; 2009
Figure 32: LPs’ anticipated level of Private Equity commitments at the end of 2010
100%
90%
80% Lower than target
70% allocation
60%
50% Equal to target
40% allocation
30%
20% In excess of target
10% allocation
0%
North American LPs European LPs Asia-Pacific LPs
Source: Author’s own based on data from Coller Capital; «Global Private Equity Barometer - Winter 2009»;
2009.
However, some investors, in order to rebalance their portfolio, have increased their Private
Equity allocation (for example, the pension fund CalSTRS had an allocation of 14.4% of its
portfolio when the threshold for this asset class was only 11%; they finally increased their
allocation limit to 15%108). Other pension funds and insurance companies over-allocated to
this asset class have also forced some GPs to lower their NAVs in order to reduce their total
exposure to this asset class.
Figure 33: Plans to address the over allocation issue
Consider sale on the

secondary market
Wait for problem to Investors in Private

correct itself through Equity (except
"numerator" effect fund-of-funds and
secondary funds)
Increase allocation
Fund-of-funds
Wait and see
0% 20% 40% 60% 80%
Source: Author’s own based on data from Fidequity; «Global Private Equity LP survey – Q3 2009»; 2009.
108
Preqin; «Global Private Equity review»; 2009
According to a survey by Fidequity carried out in the third quarter of 2009, only 10% of
investors in Private Equity (except secondary funds and funds of funds) and 22% of the funds
of funds considered accessing the secondary market to solve their over allocation to Private
Equity.
4.2.2 The new requirements of the financial institutions

Banks and other financial institutions are selling more and more Private Equity assets
due to a desire to strengthen their balance sheets in order to comply with the new solvency
ratio requirements and the recently approved Volcker rule. It is estimated on the balance
sheets of the six largest American banks and AIG there is currently more than $130 billion
invested or committed in Private Equity funds for sale109.
i. Basel II
Since the implementation of the new Basel II accords which modify the weighting of
assets, the cost of financing Private Equity investments has been multiplied by
approximately 2.0x to 3.0x110. Private Equity assets weigh between 190% and 400%
(depending on the regulator in each country and on the interpretation of Basel II) of their
NAV more than their unfunded part111. In order to comply with the solvency ratios (CT1, Tier
1, Tier 2) banks have to strengthen their balance sheets by increasing capital resources or
selling assets. Private Equity assets, in addition to being illiquid, have now become expensive
to own for the banks who had generally invested in this asset class as a means to win
business with the funds (“pay-to-play funds”) but have never considered these to be
strategic assets112.
ii. “Volcker Rule”: the 3% rule113

In 2010 regulatory changes will be a key element that will have to be monitored.
President Obama’s bill called the “Volcker Rule” was approved on the 20th of May by the US
senate and became a law on the 21st of July 2010.
Under this rule banks will only be allowed to invest up to three percent of their total Tier 1
capital in alternative investments. This bill could result in the secondary sale of proprietary
investments in Private Equity of many banks. With exposure to be capped at three per cent
109
Sarría, Ignacio; «¿Qué pasa en el mercado “secundario” de capital riesgo?»; 14 April 2009,
www.cotizalia.com; (last accessed: 13 January 2010)
110
Greenpark Capital; «Impact of the credit crunch on the secondaries market»; 2008
111
See appendix 7.13 which summarises the call to Campbell Lutyens (10 March 2010)
112
Hoflich Peter; «The search for liquidity focuses on disposing of illiquid assets»; 4 February 2010;
http://www.theinvestoraudit.com/ (last accessed: 05 de February 2010)
113
Davis Polk & Wardwell LLP; «Senate-House Conference Agrees on Final Volcker Rule»; 25 June 2010
many banks will be forced to sell off Private Equity assets mostly by spinning out their
Private Equity investment group (such as Citigroup did in July 2010) or wait and allow the
funds to harvest their investments and wind-down.
Table 5: Tier 1 capital and 3% cap of five major US banks
(in billions) Tier 1 3% of Tier 1

BoFA ML 155 4.7
JP Morgan 131 3.9
Citi 119 3.6
Goldman Sachs 68 2.0
Morgan Stanley 49 1.5
Source: Author’s own based on data from Q1 2010 financial statements.
The table above provides an estimate of the capacity the five major US banks have to make
proprietary investments in alternative funds. It demonstrates this limit is likely to force
banks such as Goldman Sachs to divest assets from its Private Equity investments. Also this
could result in Goldman abandoning its Bank holding charter so as to avoid the Volcker rule.
The other aspect of the rule would prevent banks from owning a commitment that
represents more than three per cent of the fund’s total capitalization which will force many
banks to sell part of their holdings in Private Equity funds.
Banks would have two years to comply with this new rule and can qualify for an additional
period of three years. Also, banks can benefit from another five year extension to divest
interests in so-called illiquid funds. Essentially banks may have up to ten years to divest
Private Equity assets.
4.2.3 An increasing pressure on the investors: fall in the

distributions combined with an increase in the capital calls
Historically low distributions combined with increased capital calls will increase the
financial pressure on LPs.
In reaction to the credit crunch merger and acquisition volume decreased and IPO exits have
become challenging due to financial market volatility. Therefore, funds are selling fewer
assets which do not allow them to make significant distributions to their investors.
Figure 34: Distributions as a % of NAV
Source: JP Morgan Asset Management; «Secondary Private Equity Discussions»; 2009; Thomson Financial/
VentureXpert.
Economic uncertainty combined with the high volatility of the markets has slowed the pace
of the capital calls. According to a study by Cogent Partners, capital calls in the first quarter
of 2009 represented 24% of those made in the fourth quarter of 2007114.
However since economic indicators are improving GPs are expected to accelerate capital
calls within the coming months which, combined with historically low distributions, will
increase financial pressure on LPs115. According to a study by Fidequity in 2009 more than
80% of traditional and non-traditional investors forecast that GPs were going to increase the
pace of capital calls in the next 12 months116.
114
Cogent Partners; «Cogent Research: First Quarter 2009 Valuation and Cash Flow Analysis»; 2009
115
Permal Capital Management LLC; «Private Equity observations-Golden age of secondaries?»; August 2009
116
Figure 35: Anticipated changes in capital calls in the next 12 months
Moderatly increase
Significantly increase
Non-traditional
Moderatly decrease
Traditional
Significantly decrease
Stay the same
0% 20% 40% 60% 80%
According to a survey by Coller Capital it is likely that 10% of LPs will not be able to comply
with their financing requirements within the next two years117 dramatically increasing their
need for liquidity. Therefore, in order to prevent default, these LPs are likely to seek liquidity
by accessing the secondary market118.
4.2.4 The improving economic outlook

After the economic crisis that began in 2007 and following the bankruptcy of Lehman
Brothers, the rescue of many banks and insurance companies gave way to great uncertainty
in the markets. Since March 2009 macroeconomic indicators have improved and the public
markets have rebounded reflecting better economic conditions. Companies can now look
forward to stabilisation or growth. Due to this improved outlook, the net asset value of the
underlying assets is stabilising.
This environment allows for greater optimism regarding investee companies prospects and
their respective valuation reducing the risk of investments in Private Equity (primary and
secondary).
117
Coller Capital; «Global Private Equity Barometer - Summer 2009»; 2009
118
The Boston Consulting Group, Inc.; IESE; «Driving the shakeout in private equity: The role of investors in the
industry’s renaissance»; 2009
4.2.5 The bid offer spread is reduced

In 2008-2009, the spread between bid and offer prices prevented many transactions
from being executed. The closing rate for transactions was very low and limited the
transaction volume in the market. This chasm between buyer and seller pricing expectations
prevented many transactions from being carried out in the short term and was the greatest
constraint for the period 2008-2009. According to AlpInvest Partners, only 20% of secondary
investment opportunities which came to market in the second half of 2008 actually
closed119.
In order to understand when this spread can be reduced one must analyze its causes. The
spread has three major explanations:
The valuation imbalance: This imbalance is attributable to the lag between the
NAV and the market value. When public valuations are falling the value of Private
Equity investments fall as well creating a difference between the real market
valuation and the last published net asset value (NAV) of the fund. This difference is
due to timing (the so-called lag of the NAV120) and the managers’ valuation methods.
Although this gap has been narrowing since the application of rule FAS 157, it
remains an issue.
The uncertainties of public market and global economic outlook.
The traditional mechanical imbalance in each market between seller and buyer.
As macroeconomic and market conditions are improving, the outlook for the
portfolio companies improves as do their fundamentals. Buyers reflect the improvement in
the companies’ fundamentals and the reduction in risk by increasing their valuations. When
market valuations increase, the valuation imbalance (1) is reduced. As the outlook improves,
the natural imbalance (2) due to uncertainties in the economic environment is also reduced.
Finally, due to the reduction in distributions and increased capital calls121, financial pressure
increases on sellers, which also reduces the traditional bid/offer spread (3). For all these
reasons, we can see the components of the spread are reduced which subsequently reduces
the bid-offer spread.
According to a survey by Fidequity in 2009, this spread reduced at the end of 2009122 and
will be sufficiently reduced in 2010 to increase deal flow. Indeed, more than 80% of
119
120
See section III; 3.3.4. The lag of the NAV
121
See 4.2.3. An increasing pressure on the investors: fall in the distributions combined with an increase in the
capital calls
122
See appendix 7.3 and 7.9 which summarise the call to Breslin (2 December 2009) and Campbell Lutyens (10
December 2009)
traditional and non-traditional investors forecast this spread will have fallen enough at the
end of the first half of 2010 to be able to stimulate deal flow123.
Figure 36: Timing of the tightening of the bid/offer spread
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Traditional
Q3 2010
Non-traditional
Q4 2010
2011 or later
Never
0% 5% 10% 15% 20% 25% 30% 35% 40%
The sellers and the fund managers (GPs) must also have realistic pricing expectations
reflecting future value rather than historical market valuations124. Fund managers must
value their investments in a fair manner (fair value) to avoid creating an imbalance between
the valuations. When the spread is reduced, participants will be able to agree on valuations
and deal flow will be able to grow to never-before-seen levels in this market.
4.2.6 A market that is becoming a more important asset class for

investors
Investors are increasingly attracted to this asset class due to its growth and
opportunities. According to a study by Coller Capital, 32% of limited partners intend to
increase their allocation to secondary funds within the next two years125.
123
124
125
Coller Capital; «Global Private Equity Barometer - Winter 2009-2010»; 2009
Figure 37: Anticipated changes to LP’s exposure to secondary funds over 2010-2011
No plans to
invest Increase
26% 32%
Decrease
5%
No change
37%
Source: Author’s own based on data from Coller Capital; «Global Private Equity Barometer - Winter 2009-
2010»; 2009.
4.3. Ever more structured operations

According to UBS’s secondary advisory team, structured transactions are the subject
of growing interest given current risk aversion126. A well-structured transaction provides
desired liquidity, allows maintaining relationships with GPs, and minimizes accounting
impacts of the transaction. Furthermore, it allows for maximization of transaction value for
the seller without impairing the investor’s returns. However, these sophisticated structures
do require the use of an experienced adviser.
126
UBS Private Funds Group; «Secondary capabilities» (Pitchbook); 2009
PART III:
Valuation in the Private

Equity secondary market
III. Valuation in the Private Equity secondary market - 76 -
III. VALUATION IN THE PRIVATE EQUITY SECONDARY MARKET
This section focuses on valuation in the Private Equity secondary market. Given that
transactions of direct interests in portfolio companies are valued according to well
established valuation methods, this section will concentrate on the valuation of limited
partnership interests and intends to provide a reliable guide to valuation in the secondary
market.
1. Historical market valuations
1.1. Transactions: historical valuation
1.1.1 General trend

After an analysis of the available data on secondary market valuations127; it was
decided that data from the secondary advisory firm Cogent Partners’ would be used. Since
2003 Cogent Partners has published an annual, and since 2008 a biannual, analysis of Private
Equity secondary market valuations. These market valuation analysis reports128 are
reference points and provide us with the result of bids that Cogent has received for the
assets that it has placed in the market for its clients. Since this company’s dealflow is the
largest among all the advisers (in terms of number of transactions), the information provided
in these reports allows us to glean an accurate valuation of the market.
The reports provide the average of the best, medium and lowest bids from the first rounds
of received offers. The valuation in relative terms measures the value of the bid in relation
with the asset’s last published NAV129.
127
Analysis in appendix 10. Historical valuations in the secondary market by asset type
128
See Cogent Partners «Secondary Pricing Trends and Analysis» available on Cogent Partners’ website
129
The valuations de the Private Equity portfolios (NAV) are usually published each quarter.
Figure 38: Secondary bids over time (as a % of last fund’s NAV)
110%
100%
90%
Average
High
80%
Average
70%
Median
60%
Average
50% Low
40%
30%
2003 2004 2005 2006 2007 H108 H208 H1 09 H2 09 H1 10
Source: Author’s own using data from Cogent Partners pricing analysis (2007-2008-2009-2010).
The figure above portrays the historical trend in the secondary market and the spread in the
different bids. One can clearly see a very large increase in valuations from the first half of
2009 to the first half of 2010 at 79.6% of NAV.
However, this analysis does not take into account the funds’ funding ratios and can
therefore be altered by a change in the mix of the assets placed in the market.
Given that the least funded interests entail greater unfunded commitments for buyers, the
application of a discount on this unfunded part (that must be funded at nominal value)
mathematically entails an even larger discount on the asset’s NAV. In order to overcome this
effect it is necessary to compare the value of the bid plus the unfunded part with the total
value of the exposure to the asset (that is, the value of the last published NAV plus the
unfunded part of the asset)130.
130
Cogent Partners; «Secondary Pricing trends & analysis, January 2010»; 2010
Figure 39: Value of the best bid in comparison with the total exposure to the asset (NAV +
unfunded)
110%
100%
90%
80%
% of total
70% exposure
60%
% of NAV
50%
40%
30%
2003 2004 2005 2006 2007 H108 H208 H1 09 H2 09
Source: Author’s own using data from Cogent Partners pricing analysis (2007-2008-2009).
Given the liquidity squeeze that has affected many institutions since the market downturn in
2007, many institutions have wanted to get rid of the unfunded commitments on their
balance sheets. This has led to many highly unfunded limited partnership interests being
offered in the market.
This analysis removes the effect of the change in the mix of the assets available in the
market. Upon comparing the two analyses in the graph above, we can clearly observe the
effect of the credit crisis that increased the mix of highly unfunded interests sold in the
market.
We can also observe that the recent increase in secondary valuations is not due to a change
in the mix of the assets but rather is based on a real increase in the valuation of the
underlying assets.
Furthermore it may be highlighted that the current valuation slightly exceeds that of 2003
when the market rebounded after the technology bubble burst. Therefore, the current trend
seems to be following the historical trend.
1.1.2 The valuation depends on the type of asset

Depending on economic conditions, each type of asset behaves in a different
manner. It would therefore be important to compare the valuations over time across the
different fund types according to whether they are leveraged buyout funds (LBO), Venture
Capital funds, or other funds investing in real estate, infrastructure or distressed assets.
Figure 40: Historical valuation of the best bids received for each fund type (% of the NAV)
120%
110% LBO
100%
90%
80%
Venture Capital
70%
60%
50%
40% Others (Real estate,
30% infrastructure,
20% distressed)
2005 2006 2007 H108 H208 H1 09 H2 09
Source: Author’s own using data from Cogent Partners pricing analysis (2007-2008-2009).
Clearly, there is an overall trend in the secondary market. We may also highlight in the graph
above a trend for each type of asset exchanged in the secondary market. This is due to the
fact that underlying assets of each fund evolve differently according to economic cycles.
Valuation of the funds is therefore driven by valuation of the underlying assets.
Although sector specific valuations for the years 2003-2004 are not available, the period
after the technology bubble burst stands out with the low valuation of Venture Capital funds
that reflect the fall in the valuation of these funds’ underlying assets.
Since 2009, the value of leveraged buyout funds has been lower (68.9% of their NAV) than
those of Venture Capital (75.4% of their NAV) due to the impairment of many portfolio
companies in these funds which are highly leveraged and therefore have a high default risk
in difficult economic conditions combined with high refinancing risk.
1.1.3 The valuation depends on the funding ratio

The valuation of an asset in the secondary market largely depends on its funding
ratio. This ratio measures the capital funded by the investors against the total commitment
of the investors in the fund.
Since investors generally do not know in which assets the unfunded commitment is going to
be invested it represents a “blind pool” that conveys an additional risk producing a negative
effect on valuation. Furthermore, since the buyer will have to assume this commitment at its
nominal value if acquiring a fund interest, there tends to be a positive correlation between
the funding ratio and valuations.
Table 6: Effect of the funding ratio on the valuation (H1 2009)
Average of the best bids (% of the NAV)

<50% funded >50% funded
LBO 27.2% 42.7%
Venture Capital 51.7% 36.0%
Source: Author’s own using data from Cogent Partners; «Secondary Pricing analysis interim update, summer
2009»; 2009.
The table above demonstrates that leveraged buyout funds follow this correlation unlike
Venture Capital funds. The additional discount applied to mature Venture Capital funds can
be explained in that buyers discount the risk these mature funds will not have enough
capital to fund next rounds of financing if required by their portfolio companies. For this
reason the GPs of these funds will have to invest in these companies from subsequent funds
or may need to raise annex funds that usually have preferred conditions131 and are more
dilutive.
1.1.4 The valuation depends on the vintage year of the fund

As well as depending on the type of asset or on the funding ratio, the valuation of a
fund also depends on its vintage year. After a period of fundraising a fund enters the
investment period which is usually five years. Depending on where in the economic cycle the
fund places investment, it may be investing funds at high or low company valuations which
directly affect its future returns.
In addition, a fund with a more recent vintage year would typically have a larger unfunded
commitment for its investors (or a lower funding ratio) when compared to a fund with an
older vintage year.
131
Cogent Partners; «Secondary Pricing analysis interim update, summer 2009»; 2009
Figure 41: Valuation according to the vintage year of the fund (H1 2009) in % of its NAV
2008 41.3%
2007 26.1%
2006 39.7%
2005 and before 43.0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Source: Author’s own based on data from Cogent Partners; «Secondary Pricing analysis interim update,
summer 2009»; 2009; average of the best bids received for all the funds.
Upon analysing the graph above, it highlights the low valuations for the vintage years 2006
to 2008 with 2007 being the lowest (26.1% of the NAV). These valuations may be explained
by the fact that while 2006 vintage funds paid higher multiples for their investee companies
and 2008 vintage funds have a low funding ratio, 2007 is the only vintage year that is
affected by both issues132.
1.2. Listed Private Equity funds
1.2.1 Concept133
Listed Private Equity funds are listed vehicles that allow participation in Private Equity
investments in unlisted companies or in fund portfolios, without needing to invest much
money or be an institutional investor.
There are two broad types of listed Private Equity funds:
Listed funds that invest directly134: These funds invest directly in companies that
together constitute a Private Equity portfolio. Example: HgCapital.
Fund of funds135: These funds invest in a portfolio of Private Equity funds that
then invest in companies. Example: Pantheon International Participations.
132
Cogent Partners; «Secondary Pricing analysis interim update, summer 2009»; 2009
133
Listed Private Equity Association; «Eight Steps for analysing Listed Private Equity Companies»; 2009
134
See scheme available in appendix 11.1
There are also hybrid funds such as Graphite Enterprise or Electra Private Equity that invest
directly and indirectly (through Private Equity funds) in companies.
Listed funds that are invested directly are usually managed by an investment firm that may
be related to the listed vehicle (Beteiligungs AG) or not (Standard Life European Private
Equity). In any case, even if the listed vehicle has no ownership interest in its investment
firm, the manager usually has the same name as the listed fund (F&C Private Equity
managed by F&C Asset Management).
1.2.2 Historical trading: a proxy towards the valuation in the

secondary market
Since these listed funds are invested in Private Equity assets, they usually represent a
good proxy for valuation in the secondary market. Upon comparing the trading average of
some listed vehicles with their last published net asset value (NAV) it appears they can be
useful in approximating valuation in the Private Equity secondary market.
Figure 42: Historical trading of the listed Private Equity funds – Premium / (discount) with its NAV
136
Source: UBS; Thomson Datastream (19 July 2010) .
As of the 19th of July 2010, these funds on average were trading at 66.4% of their NAV (that
is, with a 33.6% of discount).
After comparing the historical trend of the trading average of some listed Private Equity
funds to the best bids received in secondary transactions it is apparent there is a very clear
correlation.
135
See scheme available in appendix 11.2
136
The index includes the following listed Private Equity funds: Candover Investment Trust, Dunedin Enterprise
Investment Trust, Electra Private Equity Investment Trust, F&C Private Equity A Trust, F&C Private Equity B
Trust, Graphite Enterprise Trust, HG Capital Trust, Mithras Investment Trust, New Star Private Equity, Northern
Investors Company, Pantheon International Participations, Prelude Trust plc, Private Equity Investors plc,
Standard Life European Private Equity Trust, and SVG Capital.
Figure 43: Comparison between trading of listed Private Equity funds and bids received in the
secondary market
120%
110%
Average
100% highest
90% bid on the
80% secondary
market
70%
60%
Listed
50%
Private
40% Equity
30% funds
2006 2007 H108 H208 H1 09 H2 09 H1 10
Source: Author’s own using data from UBS and Cogent Partners pricing analysis.
Preqin, a firm that undertakes studies and maintains databases of the secondary market,
developed an algorithm that provides price indications for interests in the market by using
the trading activity of listed Private Equity funds. It has demonstrated a correlation between
trading of these funds and their valuations in the secondary market. However, in order to
accurately estimate the real value of these assets, the following elements need to be
considered: fund type (VC/LBO/ Other), vintage year, GP’s historical returns, fund’s track
record, funding ratio and market effect137.
1.2.3 Limits of comparison with the Private Equity secondary

market138
The use of trading activity of listed Private Equity funds provides an approximation of
value in the secondary market. However, it integrates components that distort its value and
limit the chances of precisely valuing assets in the secondary market.
i. The valuation depends on the underlying asset

The valuation of a limited partnership interest or of a portfolio company depends on
each type of asset according to its investment targets (LBO, VC, Other), funding ratio, vintage
year, management team and the quality of the portfolio’s assets.
137
See appendix 7.4 which summarises the email from Preqin (2 December 2009)
138
See appendix 7.9 which summarises the call with Campbell Lutyens (10 December 2010)
ii. Market effect

The trading of Private Equity funds is distorted by market effects. It is distorted by the
general mood of the market (bearish/bullish) and the effects of more or less liquidity in the
market.
iii. Over-commitment strategies

Listed Private Equity funds, particularly those invested indirectly (funds of funds),
usually employ an over-commitment strategy in the underlying funds. That is, they commit
more money to the underlying funds than they have to finance their capital calls. This
strategy is based on the fact that since not all commitments are called for at the beginning of
the life of a fund investors can attempt to finance future capital calls with distributions from
other funds.
This allows for an increase of the investor’s returns by reducing the negative effect of the
cash drag (negative effect of un-invested money) on returns and by efficiently managing the
investor’s resources. In bullish economic cycles this strategy significantly improves returns.
However, when the pace of distributions falls and capital calls increase it may put the fund in
danger of not fulfilling its obligations due to investor capital call default.
iv. Use of leverage

Listed Private Equity funds are usually leveraged vehicles that allow maximization of
returns in bullish markets but may have the opposite effect in bear markets. This effect,
called leverage effect, can distort the trading value of the fund.
In view of these limitations, the use of trading activity of listed Private Equity funds
may not be an entirely accurate measure of the real value of secondary assets. It does
however allow approximating the general trend of the market.
2. How to theoretically value this asset

When valuing a limited partnership interest there are two valuation methods. The
top-down method consists of applying the current discount/premium present in the
secondary market to the last published NAV of the fund manager. In contrast, the bottom-up
method is based on the intrinsic value of the fund’s underlying assets and values the interest
by discounting its cash flows. The bottom-up method can only be applied if the information
necessary to value the asset is available.
Figure 44: Two valuation methods of the secondary assets
Source: Author’s own using data from Clark, Geoffrey, and Christopher Kojima. «Opportunities and challenges
in Secondaries»; Goldman Sachs in The Journal of Alternative Investment, 74-86; 2003.
2.1. Top-down method

This method focuses on valuing assets using the current market valuation. In the
secondary market this can be done by two main methods:
Valuation by comparable transactions
Valuation by the historical trading of listed Private Equity funds
As a traditional valuation using multiples a universe of funds with similar characteristics must
be established. Characteristics would include investment style (VC, LBO, Other), funding
ratio, vintage year, management team track record and fund returns.
2.1.1 The transaction or trading value/NAV ratio

Both methods are based on applying the average existing valuations or the trading
value divided by the most recent value of the asset (NAV) to the net asset value of the asset
that we wish to value.
However, depending on the manager and the LPA, there may be different ways to value the
assets and calculate the NAV. For this reason one must first check that the NAV used in the
valuation reflects the real value of the underlying assets and that they are valued in the
same way as comparable funds.
Currently managers use very similar methods to calculate the NAV of their fund given that
organisations such as the IPEV (International Private Equity and Venture Capital Valuation) in
Europe or the PEIGG (Private Equity Industry Guidelines Group) in the United States have
created Private Equity fund valuation guides which strongly influence the general method to
be followed in calculating the NAV of portfolio assets139.
2.1.2 Comparable transactions method

After having determined the characteristics of the fund to be valued, transactions of
comparable funds in the last quarter are researched in order to compare NAVs for the same
quarter and since NAVs are usually published quarterly.
The ratio of the price paid divided by the NAV of these comparable transactions (Price/NAV)
is determined and this ratio applied to the last published NAV of the fund to be valued.
If an interest in the same fund was exchanged, assuming enough public information, the
ratio is applied in this transaction and corrected for further capital calls or distributions that
have taken place after the transaction.
2.1.3 The valuation method by the trading multiples

After having determined the characteristics of the fund to be valued, listed Private
Equity funds with similar characteristics are researched. The ratio is calculated by dividing
the total value of the fund (market capitalisation + debt) by its last published NAV. This ratio
is then be applied to the last NAV of the fund to be valued.
2.2. Bottom-up method: the valuation model

In this method the value of a limited partnership interest will be determined by using
the fundamental value of the fund’s underlying assets and the fund’s individual
characteristics. These considerations are based on the valuation guidelines developed by the
IPEV140 (International Private Equity and Venture Capital Valuation), theoretical and practical
knowledge, present research, and interviews with market participants. The result is a
valuation model that can be used to value a limited partnership interest in a Private Equity
fund.
139
IPEV; «International Private Equity and Venture Capital Valuation Guidelines»; September 2009
140
IPEV; «International Private Equity and Venture Capital Valuation Guidelines»; September 2009
2.2.1 Structure of the bottom-up valuation method of a fund’s

interest
The bottom-up valuation method consists of the valuing the fund’s interest by
discounting its future cash flows.
Underlying investments and the unfunded commitments are projected over time and a
timing of the fund’s cash flows (capital call, distributions) is assumed. After being projected,
the cash flows are adjusted according to distribution priority or “waterfall” of the fund and
then discounted at the target gross rate of the secondary investor.
Figure 45: Structure of the bottom-up valuation method
This valuation model, used by the majority of secondary market investors, requires flexibility
that allows simulation of different assumptions according to the scenario being analysed
(upside, base, downside).
2.2.2 Valuing the underlying asset

The valuation of a limited partnership interest is based on the collective valuation of
the fund’s underlying assets. The value of underlying investments needs to be projected over
time; that is, how much the investments are worth in each year of the life of the fund. It
basically consists of projecting the value of the assets over time by using growth and
valuation assumptions.
This valuation depends on the type of asset: debt or equity, leveraged buyout, Venture
Capital, real estate, infrastructure etc. This paper does not attempt to explain the valuation
method for each type of underlying asset, but rather for a limited partnership interest. For
this reason, we shall focus more on the valuation of the two most important funds types in
the secondary market: LBO funds and Venture Capital funds.
i. Valuation of investments in leveraged buyouts (LBOs)

Leveraged buyout funds usually have recurring and stable cash flows over time. In
order to value a leveraged investment over time, a projection of the operations of the
company will be made according to growth assumptions. These assumptions must be based
on discussions with the managers if possible and if not then on reasonable inferences about
the sector using public information.
In this valuation model, it is assumed that cash flows serve to repay the debt as projected
over time.
Each year the equity is valued by applying a multiple (EV/EBITDA) to the EBITDA of the
company and deducting the existing net debt. The value of the investment is then calculated
by applying the fund’s ownership percentage.
If the debt financing of the transaction is traded (the company Cortefiel as an example) then
current trading levels141 are considered as they provide insight on how company’s creditors
view the company’s risk profile. If the debt is traded at a deep discount it is inferred that
creditors do not expect to recover all their money and it is also assumed that the value of
the shareholders’ investment has fallen dramatically142.
ii. Valuation of investments in Venture Capital

Venture Capital portfolio companies generally have limited operational track records.
They often do not have steady cash flow generation and are valued in a very particular way
depending on their activity and business model. For example, companies that operate
websites can be valued with multiples such as EV/Number of unique users or EV/Number of
registered users. The investor must analyse the company’s business plan, its strengths and
advantages over its competitors, the quality of the management team and the likelihood of
being diluted in new financing rounds.
141
Loan trading levels can be found on Markit (https://products.markit.com/home/login.jsp)
142
Clark, Geoffrey, and Christopher Kojima; «Opportunities and challenges in Secondaries»; Goldman Sachs in
The Journal of Alternative Investment, 74-86; 2003
If a recent corporate transaction exists that allows us to value the company (financing, share
transaction) then this can be used to value the investment143.
2.2.3 Project the unfunded144

Besides the underlying assets, the acquisition of a limited partnership interest entails
financing commitments. This part, called the unfunded commitment, must be projected over
time in order to estimate its potential returns to value the limited partnership interest.
The unfunded can be invested in two ways:
• Follow-on investments: The managers reinvest funds in portfolio companies. The
projection of these investments is similar to the projection of the underlying assets
and is fairly objective.
• New investments: The projection of the returns of these investments is much more
subjective and is usually conditioned by the quality of the management team.
The secondary investor usually speaks to the manager about his plans for investing the
unfunded in order to be able to project as precisely as possible the returns that may
reasonably be expected. However if this information cannot be obtained it is usually
projected according to the quality of the fund managers.
i. Evaluate the quality of the management team (GP)

In order to be able to project the returns of the unfunded commitment, the quality of
the managers is key given that they decide on future investments. The quality of a
management team is usually evaluated by examining the previous experience of the
members of the investment team, the track record of their previous funds, and the returns
of current fund. In addition, the risk of that some members of the management team may
leave is usually evaluated (a clause called “Key man clause” can be included in the PSA). Last
but not least the secondary investor needs to assess if the GP plans to raise further funds
since the managers may not be incentivised to achieve high returns in order to facilitate
further fundraising145.
ii. The projection multiples of the unfunded

Discussions with different participants in the market provided insight on the
projection multiples used to project the returns of unfunded commitments over time. These
143
Clark, Geoffrey and Christopher Kojima; «Opportunities and challenges in Secondaries»; Goldman Sachs in
144
See appendix 7.1 which summarises the call to UBS (26 November 2009)
145
Real Deals; «Secondaries roundtable 2009»; 2009
multiples should be used when available information is not enough to estimate returns
according to a more objective criterion than the quality of the management team. The table
below provides projection multiples for unfunded commitments over time according to the
quality of the management team. However it does not pretend to be exact given that it may
vary by each fund type (VC, LBO, Mezzanine, etc.), size, and average historical returns146 of
the fund type which change over time.
Table 7: Projection multiples of the unfunded according to the quality of the management team
Quality of the management team Good Base Bad

Return multiple 1.7 1.4 1.2
Source: Author’s own based on own survey.
2.2.4 Determine a timing of capital calls/distributions

Once the underlying assets have been valued over time according to different growth
scenarios and the unfunded commitments have been projected, the timing for different
fund’s cash flows then needs to be determined.
If possible, the secondary investor must speak with the fund managers to understand their
capital call/distribution calendar and obtain the most accurate information possible. If it is
not possible to get this information from the GPs a calendar must be estimated. In order to
make a prudent valuation an aggressive calendar of capital calls (managers call for the funds
very rapidly) and a conservative one for distributions (it takes a bit longer than expected to
sell the companies) is usually followed147.
2.2.5 Aggregate the cash flows in the fund’s waterfall

Once the underlying assets have been valued over time according to different growth
scenarios and unfunded commitments projected throughout the life of the fund, it is
necessary to aggregate the different cash flows in the waterfall. That is, one has to add all
the cash flows of capital calls and distributions of cash in the accounting structure of the
fund according to the previously determined timing.
This structure, called waterfall, simulates the capital calls and distributions within the fund’s
vehicle. Basically, the capital calls are cash inflows throughout the investment period and the
distributions are cash outflows during the distribution period. The fund will also have
management costs that will be integrated into its structure.
146
The historical returns usually come from databases such as Venture Expert
147
Cogent Partners; «Pricing private equity secondary transactions» 22 July 2002; www.altassets.com (last
accessed: 26 January 2010)
i. Capital calls
During the investment period, usually the first 5 years of the fund’s life, the fund
managers will gradually call for the capital committed by the investors every time they find
an investment opportunity. They will also call for capital in order to cover fund
administration and management costs. Until distributions outweigh the necessary capital
calls, they will keep calling on investors. GPs may call for less than what was originally
committed by the investors (because they cannot find investment opportunities) but cannot
call for more unless the investors agree.
ii. Fund management costs

Throughout its life, the fund must assume costs that are detailed and explained in the
LPA. The three largest categories are the following:
• The fund’s annual operating expenses
The determination of costs covered by the fund is completed by examining its LPA. They
usually seek to cover the basic administrative costs of the fund: administrative staff,
accountancy, tax and legal advice, travel costs, communications, etc.
• The fund management fees148
Management fees are defined in the LPA. They usually represent 2% of the assets under
management. This management fee usually evolves throughout the life of the fund.
During the investment period, the management fees are usually 2% and are calculated on
the total amount committed to the fund until the deployed capital reaches a pre-determined
threshold. The logic is that since the managers do not manage many assets, given that they
have not called for all the commitments, but are actively looking for investment
opportunities, they are remunerated for their work according to the total amount
committed to the fund.
During the distribution period, GPs do not have to seek further investment opportunities
and therefore it is assumed that their management fee must fall according to the
distributions. For this reason, during this period, the management fees usually fall to 1.5%
and are based off the aggregate cost of the portfolio companies, which is reduced with each
distribution.
• The management fees of the portfolio companies:
The general partner also charges the portfolio companies consulting fees. This fee may be
fixed or indexed on an indicator (sales, EBIT). The fund receives the commission (inflow) and
148
Tuck School of Business - Center for Private Equity and Entrepreneurship; «Note on limited partnership
agreements»; 2003
usually shares it between the general partner and the LPs (“management fee offset”). The
allocation of the fee is usually 80/20, that is LPs receive 80% and GPs 20%. Currently, this
consulting fee is controversial and moving more and more towards the return of all of this
fee revenue to the LPs.
The key for determining the costs of a fund is to analyse the fund’s documentation (LPA).
This provides a better understanding of future costs and allows for a more accurate
projection of the fund’s future cash flows.
iii. The waterfall

Once the fund has been fully invested, it seeks to sell its investments during the
distribution period in order to distribute sales proceeds to its LPs. The structure of the
distributions (the waterfall) between the managers and the investors is unique to each fund
and defined in the LPA. However Private Equity funds usually have a similar structure and
allocation of the distributions.
There are two distribution models: the American model, which divides the distributions on a
deal by deal basis and the European model, which divides the distributions on the total of all
distributions. This paper explains the European model of the waterfalls.
The European model of distributions operates as follows:
1. Repayment of the principal of the investment and of the costs borne by the LPs.
Once the investor has recovered his investment then distributions are divided out between
the fund manager and the investor. The allocation is usually on a 20/80 basis however it
varies according to the type of assets managed (VC, LBO, funds of funds, etc.) and according
to the quality of the management team. The part the manager receives is called carried
interest.
2. The investor’s hurdle rate is a minimum preferred return that the investor is
promised in the LPA. It is usually 8% per annum. Therefore, the investor will receive 100% of
distributions until an IRR of 8% on investment has been provided for.
3. The GP catch-up is a part of the carried interest that the manager receives once the
hurdle rate has been paid. The manager then receives 100% of distributions until reaching
the agreed upon allocation of the distributions defined by the carried interest (20/80) with
the investors. If the carried interest is 20/80, he will receive 20% of the hurdle; that is:
‫ۍ‬Carried interest rate ‫ې‬

‫ێ‬ Hurdle rate ‫ۑ‬
Catch up = Total hurdle × ‫ێ‬ ൙1 − Carried interest rate‫ۑ‬
‫ێ‬ Hurdle rate ‫ۑ‬
‫ۏ‬ ‫ے‬
4. Other distributions: The distributions that exceed the combined investor hurdle rate
and GP catch up are then allocated between the manager and the investors by following the
LPA defined allocation of the carried interest (usually 80/20). That is, 80% of the remaining
distributions go to the LP and 20% to the GP.
This division of distributions pays investors and the manager on an 80/20 basis in a specific
order that allows the investors to achieve a minimum return first and to provide incentive
for the managers to achieve good returns.
It is essential to thoroughly understand the allocation of fund distributions that are being
valued in order to project the cash flows the investor will receive.
Table 8: Cash flows of the fund and distributions - Waterfall
Fund’s cash flow

- Investment costs
- Annual operating cost of the fund
- Management fee
= Capital funded for the investments and costs
+ Distributions
= Cash available for distributions to investors
- Repayment of the principal

- Hurdle rate
= Cash post hurdle
- GP Catch up
= Cash post Hurdle and GP Catch up available for distribution
- Carried Interest for GP

= Distributions to investors
2.2.6 Discount the cash flows by the cost of capital

In this part the limited partnership interest is valued by discounting the cash flows
specific to the secondary investor (capital calls of the unfunded part, distributions) at a
discount rate.
The rate used to discount the cash flows depends on the gross returns that the secondary
buyer desires. This rate changes over time according to economic conditions and perceived
risk (operating and financial) but also depends on the buyer’s cost of capital. If the buyer is a
secondary fund its cost of capital will depend on returns committed to its investors.
According to the survey held with different market participants, at the end of 2009 and the
beginning of 2010 this discount rate was about 20% (IRR). The asset’s present value (NPV) is
calculated by discounting the cash flows at the discount rate. Upon multiplying this value by
the percentage of the fund’s interest (% of fund’s interest = Commitment of the
interest/Total amount of the fund) the value of the interest is derived. This value will be the
maximum price that may be offered in order to achieve the return rate sought.
2.2.7 Sensitivity valuation analysis

At the end of the valuation process a sensitivity test to different key variables is
conducted. The aim is to determine the valuation range that can be offered for the asset
according to different scenarios.
The key variables in the sensitivity analysis are the growth scenario figures, valuation
multiples of the portfolio companies, the quality of the management team, and the timing of
capital calls and distributions.
3. Real world valuation: empirical contrast of the two

methods
This section applies the theoretical valuation fundamentals developed in the previous
sections to a real world case. A limited partnership interest is valued by applying the two
methods in order to contrast the results and to determine the optimum method of valuing
secondary assets.
In this case, the fund is a €40 million European leveraged buyout fund (LBO). The fund began
to invest on 1 June 2008 and has invested in 4 companies to date. It is 30% funded so the
interest comes with a large unfunded commitment. The GPs are of high quality given their
track record is in the top IRR quartile of LBO funds. The interest analysed involves a
commitment of €2 million. The fund’s last NAV, published on 31 December 2009 is
€10,879,000.
3.1. Top-down method: market valuation

This 2008 LBO fund has a 30% funding ratio and a quality management team. To find
the market valuation it is necessary to find valuations of transactions of funds that have the
same characteristics. Secondary market specialists use databases which contain the latest
transactions with basic characteristics listed in order to follow the valuations of each fund
type in the market.
In this case the most up-to-date available valuations of high quality LBO funds in the
secondary market will be applied. However, we do not have enough updated data to be able
to include the funding ratio in this analysis of the valuation. The funding ratio may have a
negative effect on market value and therefore the value of the fund interest from this
analysis may be higher than that existing in the market.
According to Cogent Partners, at the end of the first half of 2010, leveraged buyout funds
were traded on average at 86.4% of their NAV. Upon applying this discount to the last
published NAV, the value of the present interest will be €469,973.
Table 9: Top-down valuation of a limited partnership interest
Market value of the interest € 000

Total fund amount (nominal value) 40,000
Commitment of the interest (5%) at nominal value 2,000
Last published NAV 10,879
Current market pricing 86.4%
Value of the fund in the market 9,399
Market value of the interest (5%) 470
Due to the limitations of the valuation as a result of using the trading activity of listed Private
Equity funds, this method will not be used to value the interest. However, the current
valuation of listed funds being 66.4% of the NAV (as of 19 July 2010), the value would be
slightly inferior to the one achieved with the comparable transaction method.
3.2. Bottom-up method: valuation using the model149

This method, which requires the use of the valuation model developed with different
market experts, needs much more information than the top-down method. However, due to
the flexibility of the developed model, the valuation of a limited partnership interest is very
straightforward150.
3.2.1 Introduce the fund’s financial data and growth estimates

The fund’s last report is used to gather the financial data necessary to project and
value the portfolio companies. These data are introduced into the valuation model.
It is first necessary to know the basic characteristics of the fund: date of creation, cost
structure, total amount, commitment of the interest, funded commitment, last published
NAV and other required details. This information can be found in the LPA and in the last fund
report. Talking to the GPs can be a huge advantage in that it allows having more accurate
information on future investment plans and the state of the portfolio companies and their
growth outlook.
149
Private and confidential, this valuation model is available upon request to Arnaud van Tichelen:
a.vantichelen@gmail.com
150
It is only necessary to introduce the data into the grey cells in the hypothesis tab and then sensitise the sale
price of the interest in the tab “command table” in order to stress the returns to the sale price, the quality of
the manager and the different scenarios (upside, base, downside).
Table 10: Main characteristics of the fund

KEY ASSUMPTIONS (€000)
Investment period
Creation date of the fund 01/06/2008 Capital already commited 12.000
Next Year end of the fund 31/05/2010 Remaining investment years 3
Year
Management fees during commitment period 2,00% 1 33,3% of unfunded 9.333
Management fees post commitment period 1,50% 2 33,3% of unfunded 9.333
GP Carried interest 20,0% 3 33,3% of unfunded 9.333
Prefered return hurdle 8,0%
GP Carry catch up 100,0% Investment holding period (Years) 4
Years to liquidation 7
Total fund size (committed capital at nominal value) 40.000 Annual partnership Expenses 150,0
% of committed capital expected to be called for investments 100% Annual assumed director's fees, 500,0
Investor commitment (nominal value) 5% 2.000 transaction fees, investment banking fees,
break-up fees, advisory fees,
Invested capital 10.413 monitoring fees, or other similar fees
Other Capital calls to pay expenses 1.587 Fee income offset 80,0%
Total called capital 12.000 Charge on management fee 4,0%
Funding ratio 30,0% Charge on capital already commited 5,0%
Unfunded commitment 28.000
Last Euribor (1y) 1,30%
After entering the main characteristics of the fund (table 10), the financial data of the
portfolio companies and their growth assumptions must be introduced following 3 different
scenarios (downside, base, upside).
For the present analysis, we have used the financial data published in the last fund’s report
of the four portfolio companies. In this part we only present the analysis and the valuation of
Company A, however it has been done for the four portfolio companies of the fund.
The data has been projected using growth assumptions based on the managers’
expectations and on the growth rates of the sector of each company (table 11). We have
assumed that only maintenance investments (CAPEX) will be made in the portfolio
companies and that it will equal depreciation for each year. For all the companies, three
growth scenarios were developed to be able to sensitise the valuation to different cases. The
valuation multiple (“exit multiple” in the table) used in the different scenarios is the one paid
by the fund to invest in the company +/- 0.5 according to the scenario (upside/downside).
Table 11: Financial data and growth hypotheses of a portfolio company

COMPANY A (€000)
Transaction details Exit multiple Other assumptions

Acquisition date 30/10/2008 Exit multiple 5.11 Spread debt 4.0%
Next Year end 30/10/2010 Upside 5.61 Implied Cost of debt 5.3%
Fund's Share (%) 60.0% Base 5.11 Tax rate 35.0%
Total Investment 3,000 Downside 4.61
Last NAV reported 3,128
Total net debt (last released) 7,322
Key financial inputs 30/10/2008 30/10/2009 30/10/2010 30/10/2011 30/10/2012 30/10/2013 30/10/2014 30/10/2015 30/10/2016 30/10/2017
Sales 10,014 8,848 8,317 8,151 8,151 8,314 8,564 8,820 9,085 9,358
% growth - -11.6% -6.0% -2.0% 0.0% 2.0% 3.0% 3.0% 3.0% 3.0%
Upside NA NA -6.0% -2.0% 2.0% 4.0% 5.0% 5.0% 5.0% 5.0%
Base NA NA -6.0% -2.0% 0.0% 2.0% 3.0% 3.0% 3.0% 3.0%
Downside NA NA -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 0.0% 0.0%
EBITDA Margin 3,197 2,468 2,345.5 2,298.6 2,298.6 2,344.6 2,414.9 2,487.4 2,562.0 2,638.9
% margin 31.9% 27.9% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2%
Upside NA NA 28.5% 28.8% 29.1% 29.4% 29.7% 30.0% 30.3% 30.6%
Base NA NA 28.2% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2%
Downside NA NA 27.8% 27.6% 27.4% 27.2% 27.0% 26.8% 26.6% 26.4%
Depreciation/Amortization (implied) 280 239 225 220 220 224 231 238 245 253
Exceptionnal Items - - - - - - - - - -
EBIT Margin 2,917 2,230 2,121.0 2,078.5 2,078.5 2,120.1 2,183.7 2,249.2 2,316.7 2,386.2
% margin 29.1% 25.2% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5%
Upside NA NA 26.0% 26.3% 26.6% 26.9% 27.2% 27.5% 27.8% 28.1%
Base NA NA 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5%
Downside NA NA 25.2% 25.1% 25.0% 24.9% 24.8% 24.7% 24.6% 24.5%
CAPEX - - 224.6 220.1 220.1 224.5 231.2 238.2 245.3 252.7

Capex as a % of depreciation 0% 0% 100% 100% 100% 100% 100% 100% 100% 100%
Net Working Capital 1,001.4 876.0 815.1 790.7 782.5 789.8 805.0 820.3 835.8 851.5
Working capital (as a % of sales) 10.0% 9.9% 9.8% 9.7% 9.6% 9.5% 9.4% 9.3% 9.2% 9.1%
Change in working capital - (125.4) (60.9) (24.5) (8.2) 7.3 15.1 15.3 15.5 15.7
Pension funds and liablities - - - - - - - - - -

3.2.2 The analysis and the valuation of the portfolio companies

After entering the company data into the hypothesis tab, each portfolio company is
valued. In this case, the portfolio companies are valued by using a leveraged buyout
valuation model.
First a profit and loss account is created and projected following the case being analysed
(downside/base/upside) in order to be able to project and analyse the company’s cash flows:
table 12.
Then repayment of debt is projected using the operational cash flow to repay outstanding
debt. The enterprise value of the company is then calculated using an EV/EBITDA multiple.
By deducting the net debt, we can value the equity of the company over the life of the fund.
In order to value the investment the ownership percentage of the fund is applied to the
equity value of the company.
Finally the exit of the investment is projected according to the timing assumptions (table 10)
of distributions151 and returns are calculated: table 13.
This analysis of the underlying companies allows us to project their value over the life of the
fund according to different scenarios and to estimate the distributions they may generate.
151
Depends on the investment holding period (“Investment holding period” in the model), which is usually
about four years
Table 12: Analysis and projection of the operating data of a portfolio company (base case)
COMPANY A
Scenario Base
Next year end (Accounting) 30/10/2010

Exit Year 30/10/2012
Date 30/10/2008 30/10/2009 30/10/2010 30/10/2011 30/10/2012 30/10/2013 30/10/2014 30/10/2015 30/10/2016 30/10/2017
Year>>>>> 1 2 3 4 5 6 7 8
Profit & Loss (€000)
Sales 10,014 8,848 8,317 8,151 8,151 8,314 8,564 8,820 9,085 9,358
% Growth - -11.6% -6.0% -2.0% 0.0% 2.0% 3.0% 3.0% 3.0% 3.0%
EBITDA 3,197 2,468 2,346 2,299 2,299 2,345 2,415 2,487 2,562 2,639
% margin 31.9% 27.9% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2%
Depreciation/Amortization 280 239 225 220 220 224 231 238 245 253
Exceptional - - - - - - - - - -
EBIT 2,917 2,230 2,121 2,079 2,079 2,120 2,184 2,249 2,317 2,386
% margin 29.1% 25.2% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5%
Interests - - 388 325 263 200 135 65 - -

-
PBT - - 1,733 1,753 1,815 1,920 2,049 2,184 2,317 2,386
Taxes - - 607 614 635 672 717 764 811 835

-
Net Income - - 1,126 1,140 1,180 1,248 1,332 1,420 1,506 1,551
Cash Flows (€000)

Net Income 1,126.4 1,139.7 1,179.8 1,247.8 1,331.8 1,419.8 1,505.9 1,551.0
+ Depreciation/Amortization 224.6 220.1 220.1 224.5 231.2 238.2 245.3 252.7
- Change in Working Capital 60.9 24.5 8.2 (7.3) (15.1) (15.3) (15.5) (15.7)
- CAPEX (224.6) (220.1) (220.1) (224.5) (231.2) (238.2) (245.3) (252.7)
- Exceptional - - - - - - - -
= Cash flow for debt repayment 1,187.2 1,164.2 1,188.0 1,240.4 1,316.7 1,404.4 1,490.3 1,535.3

Table 13: Projection of the debt repayment and valuation of the investment
Debt repayment and interests (€000) 30/10/2008 30/10/2009 30/10/2010 30/10/2011 30/10/2012 30/10/2013 30/10/2014 30/10/2015 30/10/2016 30/10/2017
Opening net debt Opening 7,322 6,135 4,971 3,783 2,542 1,226 - -
-Cash flow for debt repayment 1,187 1,164 1,188 1,240 1,317 1,226 - -
=Closing debt 7,322 6,135 4,971 3,783 2,542 1,226 - - -
Interests 388 325 263 200 135 65 - -
Investment value (€000) 30/10/2008 30/10/2009 30/10/2010 30/10/2011 30/10/2012 30/10/2013 30/10/2014 30/10/2015 30/10/2016 30/10/2017
EBITDA 2,468.2 2,345.5 2,298.6 2,298.6 2,344.6 2,414.9 2,487.4 2,562.0 2,638.9
Exit multiple 5.11 5.11 5.11 5.11 5.11 5.11 5.11 5.11 5.11
Enterprise Value 12,612.7 11,985.7 11,746.0 11,746.0 11,980.9 12,340.3 12,710.5 13,091.8 13,484.6
Net debt 7,322.3 6,135.0 4,970.9 3,782.9 2,542.5 1,225.8 - - -
Pensions funds and other liabilities - - - - - - - - -
Equity Value 5,290 5,851 6,775 7,963 9,438 11,114 12,711 13,092 13,485
Investment Returns (€000) 30/10/2008 30/10/2009 30/10/2010 30/10/2011 30/10/2012 30/10/2013 30/10/2014 30/10/2015 30/10/2016 30/10/2017
Fund's Share (%) 60%
Investment date 30/10/2012
Initial investment 3000
Market value 3,174 3,510 4,065 4,778 5,663 6,669 7,626 7,855 8,091
Cash Flows - 3,000 - - - 4,778 - - - - -
Expected IRR 12.3%
Return multiple 1.6

3.2.3 Adding of the cash flows in the waterfall of the fund

After having valued the underlying companies, it is necessary to add all the cash flows
from the capital calls and distributions in the waterfall of the fund. The cash flows of the
underlying investments are added together with the costs and distribution structure of the
fund in order to calculate the total cash flows of the fund.
First, the different cash flows from the investments and distributions are added together,
but so too is the projection of the unfunded part of the fund: table 14.
The different costs of the fund are then calculated. If there are not enough distributions to
cover these costs, they will have to be funded by the LPs. In the opposite case, the cash
flows available for distributions are calculated: table 15.
The distributions then pass through the waterfall as previously explained152 (hurdle, catch
up, carried interest): table 16.
After these intermediate steps, the net cash flow available for LPs is calculated. The capital
calls are subtracted from the distributions that the limited partners receive (table 17) and
the net cash flow is calculated in each year of the life of the fund.
Finally, in order to calculate the gross return of the secondary investment, the cash flow of
the acquisition of the limited partnership interest is subtracted153 from the net cash flow
available for LPs: table 18.
152
See 2.2.5. iii. The waterfall
153
The cash flow of the acquisition of the limited partnership interest comes from the tab “Command table”. It
is calculated as if seeking to value the total fund given that it is later multiplied by the percentage of the
interest that we wish to value. Here 5%
Table 14: Cash flows from the fund’s investments

Date 31/05/2010 31/05/2011 31/05/2012 31/05/2013 31/05/2014 31/05/2015 31/05/2016 31/05/2017 - - -
Year>>>>> 0 1 2 3 4 5 6 7 - - -
Cash flows to fund from underlying investments (Year end)

Invested capital 10,413 9,333 9,333 9,333 - - - - - - -
Capital under management after investment period - - 30,150 28,000 18,667 9,333 0 - - -
Distributions - - 14,108 3,939 15,867 15,867 15,867 - - -
Invested capital - - 14,108 3,939 - - - - - -
COMPANY A - - 4,778 - - - - - - -
COMPANY B - - 4,258 - - - - - - -
COMPANY C - - 5,072 - - - - - - -
COMPANY D - - - 3,939 - - - - - -
Unfunded part - - - - 15,867 15,867 15,867 - - -
Year 1 - - - - 15,867 - - - - -
Year 2 - - - - 15,867 - - - -
Year 3 - - - - 15,867 - - -
Year 4 - - - - - - -
Table 15: Calculation of the costs of the fund

Fund income & costs
Distributions from investments - - 14,108 3,939 15,867 15,867 15,867 - - -
Annual partnership expenses (150.0) (150.0) (150.0) (150.0) (150.0) (150.0) (150.0) - - -
Annual management fee (800.0) (800.0) (800.0) (420.0) (280.0) (140.0) (0.0) - - -
Management fee offset (related to portfolio company's fees) 400.0 400.0 400.0 400.0 400.0 400.0 400.0 - - -
Cash available for distribution to LPs (550.0) (550.0) 13,558 3,769 15,837 15,977 16,117 - - -

Table 16: Waterfall of the fund

Fund Cash Flows 31/05/2010 31/05/2011 31/05/2012 31/05/2013 31/05/2014 31/05/2015 31/05/2016 31/05/2017 - - -
Capital drawn to fund investment & Expenses 12,000 9,883 9,883 9,333 - - - - - - -
Purchase of investments 10,413 9,333 9,333 9,333 - - - - - - -
Annual Partnership Expenses (150.0) (150.0) (150.0) (150.0) (150.0) (150.0) (150.0) - - -
Annual Management Fee (400.0) (400.0) (400.0) (20.0) 120.0 260.0 400.0 - - -
Distributions from Investments - - 14,108 3,939 15,867 15,867 15,867 - - -
Cash available for LP distributions - - 13,558 3,769 15,837 15,977 16,117 - - -
Repayment of Invested capital - - (13,557.8) (3,768.8) (15,836.7) (7,936.7) - - - -

Repayment of Preferred return to LPs - - - - - (8,039.9) (4,549.7) - - -
Cash available Post Preferred Return to LPs - - - - - 0.0 11,566.9 - - -
GP Catch Up - - - - - (0.0) (3,147.4) - - -

Cash available post Preferred Return and GP Catch Up to LPs - - - - - - 8,419.5 - - -
Carried Interest to GP - - - - - - (1,683.9) - - -

Distribution to LPs - - - - - - (6,735.6) - - -
Table 17: Net cash flows available for LPs
Total LPs Cashflows

Investment (capital drawn and expenses) (12,000) (9,883) (9,883) (9,333) - - - - - - -
Capital repaid in period (Capital drawn and expenses) - - 13,557.8 3,768.8 15,836.7 7,936.7 - - - -
Repayment of Preferred Return - - - - - 8,039.9 4,549.7 - - -
Distribution to LPs - - - - - - 6,735.6 - - -
Total LPs Flows (12,000) (9,883) (9,883) 4,224 3,769 15,837 15,977 11,285 - - -

Table 18: Determination of the returns of the secondary investor according to the acquisition price
Date 31/05/2010 31/05/2011 31/05/2012 31/05/2013 31/05/2014 31/05/2015 31/05/2016 31/05/2017 - - -
Returns at targeted price

Price paid 4,000
Total secondary investor flow (4,000) (9,883) (9,883) 4,224 3,769 15,837 15,977 11,285 - - -
Implied IRR 20.04%
Capital returns - - - 4,224 3,769 15,837 15,977 11,285 - - -
Capital paid (4,000) (9,883) (9,883) - - - - - - - -
Total return of the operation 2.15

3.2.4 Determination and sensitisation of the price of the limited

partnership interest according to different scenarios
The price payable for the entire fund that we wish to value is then entered.
Depending on the price used and the different scenarios chosen (of growth of the portfolio
companies and of quality of the manager), the gross return on the secondary investment will
be determined. The value of the interest is determined by multiplying the price to be paid
for the whole fund by the percentage of the interest being valued.
Table 19: Determination of the price to be paid according to scenarios and returns
Target returns (€000)
Price willing to pay (for 100% fund) 4,000 Does investment at this price reache target?
Implied price for LP interest 200 Target IRR 20.0% YES
Implied IRR 20.04% Target Multiple return 1.8 YES
Implied Multiple Returns 2.15
% of reported NAV 36.8%

% Discount to NAV 63.2%
Command
Scenario (Growth assumptions & Exit multiple) Base 2 Investment holding period (Years) 4
Unfunded Multiple
Quality of the GP (trackrecord, info available) Good 1 Good 1.7
Multiple of return (x) for unfunded 1.7 Base 1.4
Bad 1.2
In this case, a base scenario (of growth and valuation of the portfolio companies) and a high-
quality management team have been chosen.
According to present growth assumptions and the timing of capital calls and distributions
applied, the valuation of the fund that allows achieving an IRR of 20% with a multiple higher
than 1.8 times (typical minimum gross returns that secondary investors seek) is €4,000,000.
This values the analysed interest (5%) at €200,000 and represents 36.8% of its last NAV.
The model also analyses the sensitivity of the investment returns to the different key
variables used in this valuation (growth scenario, quality of the manager, and timing of the
investment).
Table 20: Sensitivity of the returns to the different key variables
Sensitivity to Price and other assumptions
Scenario (IRR) 0.20 3,700 3,800 3,900 4,000 4,100 4,200 4,300
Upside 1 23.4% 23.2% 23.0% 22.9% 22.7% 22.5% 22.4%
Base 2 20.5% 20.4% 20.2% 20.0% 19.9% 19.7% 19.6%
Downside 3 16.0% 15.8% 15.7% 15.6% 15.4% 15.3% 15.2%
Scenario (Returns) 2.15 3,700 3,800 3,900 4,000 4,100 4,200 4,300
Upside 1 2.29 2.28 2.27 2.26 2.25 2.24 2.23
Base 2 2.18 2.17 2.16 2.15 2.14 2.13 2.12
Downside 3 1.94 1.94 1.93 1.92 1.91 1.91 1.90
Quality of the GP 0.20 3,700 3,800 3,900 4,000 4,100 4,200 4,300
Good 1 20.5% 20.4% 20.2% 20.0% 19.9% 19.7% 19.6%
Base 2 17.0% 16.8% 16.7% 16.5% 16.4% 16.2% 16.1%
Bad 3 14.9% 14.7% 14.6% 14.5% 14.3% 14.2% 14.1%
Investment holding period (Years) 0.20 3,700 3,800 3,900 4,000 4,100 4,200 4,300
3 3 28.9% 28.6% 28.4% 28.1% 27.9% 27.6% 27.4%
4 4 20.5% 20.4% 20.2% 20.0% 19.9% 19.7% 19.6%
5 5 16.9% 16.8% 16.7% 16.5% 16.4% 16.3% 16.2%
6 6 14.8% 14.7% 14.6% 14.5% 14.4% 14.4% 14.3%

3.3. Comparison of the results: explanation of the difference
3.3.1 Comparison of the results
By applying the two valuation methods to the same limited partnership interest we
find very different results. The market valuation method (top-down) values the interest at
86.4% of its NAV, although the bottom-up valuation method using the valuation model
values it at 36.8% of its NAV.
Table 21: Contrast of the valuation according to the different methods
Method Top-down Bottom-up

Value of the interest (5%) 469,973 200,000
% of the NAV 86.4% 36.8%
In view of these results, it seems clear that valuation method is very important when buying
(or selling) in the secondary market. But, why is there such a difference between the two
methods and which is more trustworthy?
3.3.2 The concept of NAV is subjective

The top-down method is based on the valuation of the manager. However, although
there are portfolio valuation guidelines, GPs value their portfolio in very different ways.
Some leave the assets at their investment price, other at their market value, and some at the
price of the latest share issuance. The valuation of their portfolios is also very subjective154
given that the manager himself may make very optimistic/pessimistic estimates of the
growth of portfolio companies.
For these reasons, the concept of NAV is very subjective and cannot be used as the base for
the valuation as in the top-down method. It is therefore very advisable, when possible, for a
buyer to make his own valuation of the investments in the portfolio using the bottom-up
method.
3.3.3 Each asset is different

One of the key considerations when choosing a valuation method is the uniqueness
of each asset. Indeed, each asset is different given that it has different underlying assets,
management teams of differing quality, different cost structures, and different allocations of
the distributions. Despite trying to compare similar assets, the top-down method does not
154
“Valuation [of the NAV] remains part science, part art”: Triago; «The secondary seller’s options»; 2009
take into account the singularity of each asset and therefore does not constitute an accurate
valuation method. The only method capable of valuing the intrinsic value of the assets is the
bottom-up method that takes into account all the characteristics of the fund and its
underlying assets.
The following table clearly demonstrates that the assets’ value cannot be generalised given
that for a single type of asset there are significant variations in the valuation according to the
asset being exchanged.
Table 22: Discrepancy in the valuation of the assets (H1 2009)
% of bids on
funds Bids ≤0% of the NAV Bids <20% of the NAV Bids >60% of the NAV
All 7% 17% 13%
LBOs 8% 20% 12%
Venture 4% 17% 13%
Other 5% 5% 21%
Source: Author’s own using data from Cogent Partners; «Secondary Pricing analysis interim update, summer
2009»; 2009.
3.3.4 The lag of the NAV

The top-down method applies the valuations of the market to the last published NAV.
However, there may exist a difference between the last published NAV and the assets’
current market value due to the time that passes between the publication of the NAV and
the valuation of the asset. Since GPs usually take between 1 and 4 months to publish the
NAV of their assets the last NAV available may be up to four months old.
In a bear market valuations fall over time so that is very probable the next NAV will be lower
than the last published. The concept of NAV is very static given that it gives the value of the
asset at the end of each quarter. Although it is not very accurate as a rough proxy to market
value, the performance of a basket of public market comparables can be considered. The
gain or decline in that basket from the day of the last valuation can provide an indication of
how the NAV may have changed155.
However, because the top-down method does not take into account the change in value
between the valuation and the publication of the last NAV, it does not constitute a robust
method to value assets in the secondary market.
155
Cogent Partners; «Pricing private equity secondary transactions» 22 July 2002; www.AltAssets.com (last
accessed: 26 January 2010)
3.3.5 A buyers’ market

In the secondary market there currently exists an imbalance between large supply
and limited demand that negatively impacts valuations.
According to a study by Probitas Partners in February 2010, it was estimated that about $75
billion of assets were being offered on the secondary market156. The imbalance of capital
available to purchase funds in the secondary market minus the transaction volume closed
during the year is the capital overhang, or dry powder. This is calculated in Figure 46 below.
Figure 46: Dry powder in the secondary market in 2010 ($ billions)
60
50
40 18.5
(9.1)
30
50.8
20 41.4
10
0
Dry powder at the Secondary transaction 2009 secondary Dry powder at the
beginning of 2009 volume in 2009 fundraising beginning of 2010
Source: Author’s own; data: Dry powder and secondary transactions 2009: UBS Private Funds Group; «Adams
Street Secondary Networking Event»; 2010 – Secondary funds raised in 2009: Preqin; «Private Equity Spotlight
January 2010»; 2010.
Compared to the offerings of some $75 billion, the dry powder of the secondary funds in
2010 is about $50.8 billion. There is therefore an imbalance of some $25 billion that provides
a clear advantage to the buyers, creating a buyers’ market.
However, in view of the forecasts for 2010, it is interesting to compare this same $75 billion
of offerings with the dry powder that is expected in 2011.
156
Figure 47: Estimate of the dry powder in the secondary market in 2011 ($ billions)
60
50
27
40 (20)
30 57.8
50.8
20
10
0
Dry powder at the 2010 Estimated 2010 Estimated Dry powder at the
beggining of 2010 transaction volume secondary fundraising beginning of 2011
Source: Author’s own; data: Dry powder and secondary transactions 2010: Author’s own estimates – Secondary
funds raised in 2010: Probitas Partners; «Adams Street Secondary Networking Event»; 2010.
If we assume that the transaction volume will be about $20 billion (forecast with the model
assuming the base scenario) and that secondary funds raise about $27 billion in 2010
(estimate by Campbell Lutyens157 and Probitas Partners158), it is forecast that dry powder at
the beginning of 2011 will be about $57.8 billion. This represents a $17.2 billion imbalance in
the market. Therefore it is clear that the imbalance in the market will slowly be reduced. The
reduction of this imbalance will gradually end the buyers’ advantage in the market159. A
buyers’ market may change even more rapidly if transaction volume in 2010 is lower than
forecast.
However, due to the imbalance in the secondary market, valuations are distorted from the
real value of the assets and therefore cannot be used to provide an accurate value of an
asset in the secondary market: the inefficiency of the top-down method is once more
demonstrated.
157
158
159
3.3.6 Key valuation method: bottom-up

These explanations of the difference in valuations of a limited partnership interest
when using the two methods clearly demonstrate that the bottom-up method is the most
appropriate method to ascertain the value of assets on the secondary market. Indeed, it is
the only method that allows us to take into account the uniqueness of the assets and the
growth perspectives of each underlying company. Furthermore the bottom-up method
minimizes the valuation distortion attributable to the imbalance between buyers and sellers
in the market and NAV lag.
However when there is not enough information available to make a bottom-up valuation,
the top-down method should be used.
PART IV:
CONCLUSIONS
IV. Conclusions - 114 -
IV. CONCLUSIONS
1. Conclusions
1.1. Analysis of the secondary market: an opportunity for the

Private Equity industry
Analysis of the theoretical characteristics of Private Equity, its history and of current
conditions highlights the growing importance of the secondary market and its crucial role in
the development and maturity of the Private Equity industry.
The existence of a secondary market has a beneficial effect on primary assets. It allows
investors to find liquidity without needing to sell the underlying assets. This liquidity in the
market has many advantages both for LPs and GPs. It supports the investments and prevents
LPs from defaulting thereby building a strong investor base for future funds. Moreover, this
market provides value indication, price discovery, and facilitates future fundraising160.
By reducing the liquidity risk inherent in the Private Equity asset class, investment in Private
Equity is made much more attractive transforming the secondary market into a driver of
growth in the primary market.
In view of the capital raised in 2009, the secondary market is the only segment that grew in
comparison with 2008. Therefore it not only benefited the industry by attracting more
capital by reducing the liquidity risk but also by raising further capital in this growing market
segment.
For all of the reasons mentioned above, it is in the best interest of general partners to
facilitate transactions in their funds and allow limited partners to turnover within their
fund161.
1.2. The future: growth and sophistication

A constantly growing market
Although 69% of investors hoped that 2009 would be a record year in the secondary
market162, the transaction volume ($9.1 billion in 2009163) has been disappointing due to
160
Campbell Lutyens; «The Private Equity Secondaries market: a complete guide to its structure transaction
and performance»; PEIbooks, 2008
161
Ansbacher, Richard I. and Rosh, Kenneth I. and Neuschatz Zelenka, Rebecca; «Heightened Managers
Concerns for Secondary Transfers»; Fried Frank PEP Talk, 2010
162
163
UBS Private Funds Group; «Adams Street Secondary Networking Event»; 2010
market circumstances (low valuations, large bid/offer spread, FAS 157, lack of visibility).
However, it seems that 2010 will be the record year that participants in the market have
longed for to prove that it is not a current trend, nor an ephemeral market.
According to the results of the application of the present statistical correlation model, it is
projected that the market may have an average volume of between $17.5 and $22.5 billion
per annum during the next five years (2010-2014) which represents a compound average
growth rate (CAGR) of between 13% and 18.8%.
Regulated financial institutions will be the main sellers in 2010 due to the need to repay
public funds and restructure their balance sheet. Moreover, the cost of financing Private
Equity assets, the need to liquidate “pay to play” funds combined with an increase in
secondary valuations will promote activity in the market.
An increasingly sophisticated market
The market is becoming increasingly sophisticated and innovative sales structures are
used to better realize all parties’ objectives. This market sophistication is reflected in the
growing importance in the use of an adviser experienced in secondary transactions. In the
medium term it is forecast that there will be more spin-outs164 of captive Private Equity
managers of financial institutions. But there will also be more direct sales of interests in
companies165 as current market conditions necessitates their use to generate valuable
liquidity for managers.
Monitor regulatory changes
In 2010, regulatory changes will be a key element that will have to be monitored. In the
US the famous “Volcker Rule” limits banks’ proprietary investments and will have a major
impact on Private Equity activity. Although there is a transition period to comply with this
rule many financial institutions are considering selling their Private Equity investment
divisions and holdings. Any change that increases regulatory pressure on financial
institutions’ investments will have a direct effect on the sale of their Private Equity assets in
the secondary market and the spin-out of several captive Private Equity managers.
164
165
1.3. Valuation in the secondary market: trend and method

Market valuations: a controlled rebound?
After having fallen to 36% of the NAV in the first half of 2009 the market has rebounded.
During the first half of 2010, pricing for limited partnership interests in the secondary market
increased steadily to 80%166 of NAV anticipating an increase in the valuations of LP interests.
However, valuations are expected to halt their increase in the medium term due to the
supply/demand imbalance that acts as a natural ceiling167.
Although we are currently in a buyers’ market due to the supply/demand imbalance its
evolution must be tracked closely. Indeed, this imbalance may be reduced due to volumes
being raised in secondary funds and the large amount of dry powder accumulated by
secondary buyers (“There are a lot of secondary buyers that have a lot to deploy”168 Jeffrey
Bollerman; SecondMarket).
According to a survey by Probitas Partners published in November 2009, 16.4% of investors
fear there is too much dry powder in the secondary market and that it will have a negative
impact on returns169.
Valuation method for secondary assets: the supremacy of the bottom-up

valuation method
When valuing LPs’ interests in the secondary market, the bottom-up method is the most
appropriate method to ascertain the intrinsic value of the assets. This method, which is
based on analysis and valuation of the underlying assets, allows the investor to produce an
informed valuation and gives him a clear advantage. If he has the resources, experience and
necessary information, he may have more confidence in his valuation and be more
aggressive in his bid because he has a greater chance of achieving his returns170. However,
the top-down method is a good method to approximate valuations and the mood of the
market in the absence of information required for the bottom-up method.
In this context access to information becomes a significant challenge in order to be able to
make a bottom-up valuation and highlights the importance of having strong relationships
with GPs. For this reason successful secondary managers usually have primary capacities
that allow them to have relationships with GPs and get access to the necessary information.
166
See appendix 7.13, which summarises the call to Campbell Lutyens (10 March 2010); Cogent Partners;
«Secondary pricing trends and analysis, July 2010»; 2010
167
168
Deal Flow Media; «The Distressed Debt Report, Volume VI Nº4»; 2010
169
170
Clark, Geoffrey and Christopher Kojima; «Opportunities and challenges in Secondaries»; Goldman Sachs in
2. Future research
Being an initial analysis of this segment of Private Equity, some suggestions for future
research are in order.
This dissertation has discussed throughout the Private Equity secondary market but it would
also be useful to study other secondary markets such as those of hedge funds or assets
invested in debt (syndicated loans, private placements, etc.).
In studying the Private Equity industry the funds’ cost structures were examined and this
brought up the tensions currently experienced between GPs and LPs the most significant
being fees. There have been many concerns raised with respect to GP compensation and it
would be interesting to analyse the debate in the context of future fundraising.
Glossary - 118 -
GLOSSARY
Blind pool: investment commitments with no stated investment target. In Private Equity the
unfunded commitment is a blind pool given that the managers’ exact future investments are
unknown.
Bottom-up: information-processing strategy that begins by analysing the individual parts in
order to then analyse larger components. Applied to asset valuation, it consists of analysing
the underlying assets in order to then value the fund.
Capital calls: request from fund managers to draw down a part of the committed capital to
fund an acquisition or funds’ costs.
Carried interest (“Carried”): the share of profits of the fund managers in the capital gains
resulting from the operations carried out by the fund. In Private Equity funds the "carried" is
usually about 20% of the capital gains obtained by the fund.
Cash drag: negative effect caused by cash balances (or money invested in treasury assets) on
the overall return of a portfolio.
Catch up: part of the carried interest that the manager receives once the principal and a
hurdle rate has been paid to LPs. The manager typically receives 100% of the distributions up
to a shareout of the distributions defined by the carried interest (20/80).
‫ۍ‬ ‫ې‬
‫ێ‬େୟ୰୰୧ୣୢ ୧୬୲ୣ୰ୣୱ୲ ୰ୟ୲ୣ ‫ۑ‬
Catch up = Total hurdle × ‫ێ‬ ୌ୳୰ୢ୪ୣ ୰ୟ୲ୣ ൙ଵିେୟ୰୰୧ୣୢ ୧୬୲ୣ୰ୣୱ୲ ୰ୟ୲ୣ‫ۑ‬
‫ێ‬ ‫ۑ‬
‫ێ‬ ୌ୳୰ୢ୪ୣ ୰ୟ୲ୣ ‫ۑ‬
‫ۏ‬ ‫ے‬
Clawback provision: clause in the LPA by which the GP can require the LPs to return some
distributions in special circumstances.
Collateralized Fund Obligation (CFO): debt securitization of Private Equity fund or hedge
fund assets.
Covenants: agreements between a company and its creditors that indicate the financial
conditions that the debtor must observe.
Credit crunch: squeeze in the availability of credit that causes the economy to contract.
Deal flow: flow of transactions.
Glossary - 119 -
Denominator effect: in a portfolio when the value of one asset class falls, the percentage
allocation to other assets rises mechanically in the portfolio, exceeding the allocation targets
of the portfolio which then requires re-balancing.
Distressed: an asset or an investor that lacks liquidity to finance short-term commitments.
Dry powder: capital reserves available to invest.
Due diligence: process of auditing financial, legal and tax aspects of a transaction.
EBIT: earnings before interests and taxes. Operating profit.
EBITDA: earnings before interest, taxes, depreciation and amortisation.
Endowment: institution’s investments that seek to cover a part or all the needs of the
institution to which it belongs with its investment returns.
Equity: part of the company that belongs to the shareholders once they have paid their
financial obligations. Asset minus liabilities.
Fair value: amount or value for which an asset may be exchanged between interested and
fully-informed parties.
Family office: a company that offers advisory services to family assets.
Follow-on: is said of an investment when it backs an existing investment.
Funding ratio: ratio of capital funded by investors to the total commitment of investors in
the fund.
Fundraising: activity that consists of raising funds in the market.
General Partners (GPs): Private Equity fund managers.
Hurdle rate: also called preferred return, is the minimum amount of return sought by the
investor. It is usually an Internal Rate of Return (IRR) of 8%. Before this return is earned by
the LP, the fund manager can not receive any share in the capital gains.
Internal Revenue Service (IRS): tax authority in USA.
Key man clause: clause within an agreement that indicates if one or more specific key
named managers stops dedicating a required level of time to the management of a fund, the
investment activity is halted.
Know Your Customer (KYC): due diligence requirement that financial institutions must
perform to identify their client and ascertain relevant information in order to transact
financial business with them. This policy is intended to prevent money laundering and
terrorist financing.
Glossary - 120 -
Lag: a delay caused in a communication. In the case of Private Equity funds, the lag refers to
the delay between the publication of the NAV and the current asset valuation (between 1
and 4 months) that makes the valuation process more difficult.
Limited Partners (LPs): institutions or individuals that contribute capital to a Private Equity
fund.
Limited Partnership Agreement (LPA): formation agreement which sets out in detail legally
binding relations between the LPs and GP (investment policy, profit sharing, fees and
expenses, etc.).
Lock-in performance: process that consists of realizing the existing return on an asset (by
hedging, selling the asset).
Material Adverse Change (MAC): in a sale contract it is a legal provision that allows the
acquirer to withdraw from the transaction if the target suffers a substantial change.
Over-commitment: allocation of resources to an asset class in excess of the capacity.
Pay-to-play funds: funds which the banks had invested as a way to get business with the
Private Equity funds (advisory mandate, leverage) but that have never been a strategic asset.
Pre-emption right: right of first refusal.
Qualified Matching Service: approved management services for secondary transactions by
the tax authorities. The use of a QMS allows exchanging an additional 8% above the
statutory 2% of a fund’s capital commitment in a single fiscal year.
Representations and warranties: statements by which one party gives certain assurances to
the other, and on which the other party may rely.
Right of First Refusal (ROFR): right that gives its holder the option to enter a transaction
with the owner of an asset before the owner can enter into that transaction with a third
party.
Seniority: order of repayment in the event of bankruptcy. In the capital structure, this refers
to the subordination level. When one is more senior it means that it is less subordinated.
Side letter: separate agreement that is used to clarify or modify the terms of a previous
agreement.
Special Purpose Vehicle (SPV): legal entity created to fulfil a temporary and specific
objective. It may be owned by one or more persons.
Spin-out: when a division of a company becomes an independent business. In the secondary
market it is a sale structure in which the buyer acquires an entire portfolio of captive assets.
Stapled secondary: sale structure in which the buyer acquires assets of a fund together with
investment commitments in the next fund of the manager (GP).
Glossary - 121 -
Straight sale: traditional sale structure of one or more interests in funds or companies.
Strip sale: sale structure in which only a part of one or more portfolio companies or interest
in funds are sold.
Tail end: sale structure in which a fund sells its remaining assets.
Top-down: information-processing strategy that analyses the system as a whole without
going into subsystem details. Applied to asset valuation, it consists of analysing market
valuations and applying them to the asset being valued.
Total Return Swap: derivative contract in which two parties swap the cash flows. A floating
interest rate can be exchanged for the cash flows of an asset.
Track record: past performance. In the case of a fund manager, it refers to the past returns
of previously managed funds.
Unfunded: uncalled part of the committed capital.
Venture Capital (VC): Private Equity investment style that invests in the early stages of
companies.
Vintage year: the year in which the fund makes its first investment.
Waterfall: structure of how distributions are shared between the GPs and the LPs. It is
defined in the LPA.
REFERENCES
References - 123 -
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2. Reports
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Bank of Spain, financial stability nº13, 2007.
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4. Databases
- Preqin
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- Venture Expert
- Thomson financial
APPENDIX
Appendix - 131 -
APPENDIX171
1. DATABASE OF THE ADVISERS IN THE PRIVATE EQUITY SECONDARY MARKET133

1.1 Database of the financial advisers ............................................................133
1.2 Database of the legal advisers ....................................................................135
1.3 Database of the private marketplaces .....................................................136
2. DATABASE OF THE BUYERS IN THE PRIVATE EQUITY SECONDARY MARKET137
2.1 Database of the dedicated secondary buyers (LPs interest and
direct) ...................................................................................................................137
2.2 Database of the dedicated secondary buyers (only direct
transactions) ......................................................................................................139
2.3 Database of firms investing part of their funds in the secondary
market...................................................................................................................140
3. REQUEST FOR SPONSORSHIP .......................................................................... 143
4. NEWSLETTER Nº1 ........................................................................................... 144
5. SPONSORS OF THE STUDY AND INTERVIEWS................................................. 146
6. MEETING GUIDELINES..................................................................................... 147
7. SUMMARIES OF CALLS AND MEETINGS .......................................................... 149
7.1 Call with UBS (26 November 2009) .........................................................149
7.2 Call with Secondmarket (01 December 2009) .....................................151
7.3 Call with Breslin AG (02 December 2009).............................................153
7.4 Email from Preqin (02 December 2009) ................................................155
7.5 Call with Fidequity (03 December 2009) ...............................................157
7.6 Meeting with Altamar (07 December 2009) .........................................159
7.7 Call with Pantheon Ventures (09 December 2009) ...........................161
7.8 Call with Headway Capital (09 December 2009) ................................164
171
Every appendix is available upon request to Arnaud van Tichelen: a.vantichelen@gmail.com
Appendix - 132 -
7.9 Call with Campbell Lutyens (10 December 2009)..............................165

7.10 Meeting with SJberwin (14 December 2009) .......................................168
7.11 Call with UBS (02 February 2010) ............................................................170
7.12 Call with HarbourVest Partners (09 March 2010) .............................172
7.13 Call with Campbell Lutyens (10 March 2010)......................................174
7.14 Meeting with Arcano Capital (18 March 2010) ...................................176
8. ANALYSIS OF PUBLISHED HISTORICAL DATA ................................................ 178
8.1 Historical transaction volume in the secondary market ..................178
8.2 Secondary fundraising...................................................................................180
8.3 Primary fundraising .......................................................................................181
9. SECONDARY MARKET PROJECTION MODEL ................................................... 182
10. HISTORICAL VALUATIONS IN THE PRIVATE EQUITY SECONDARY MARKET186
10.1 LBO funds ...........................................................................................................186
10.2 Venture capital funds .....................................................................................186
10.3 Other funds (real estate- infrastructure- distressed)........................187
11. STRUCTURE OF LISTED PRIVATE EQUITY FUNDS ......................................... 188
11.1 Structure of listed direct Private Equity fund ......................................188
11.2 Structure of listed indirect Private Equity fund (listed fund of
funds) ....................................................................................................................189
Appendix - 133 -
1. Database of the advisers in the Private Equity secondary market

1.1 Database of the financial advisers
Company Name Position Mail
Almeida Capital Richard Sachar Managing Director rsachar@almeidacapital.com
Alpha Associates AG Peter Derendinger CEO peter.derendinger@alpha-associates.ch
Altitude Capital Advisory Brett A. Nelson Managing Director bnelson@altitudecap.com
Ariane Capital Partners Donald W. Kraftson Managing Director dwk@arianepartners.com
Augusta & Co John Edwards Partner info@augustaco.com
Autumn Capital Partners Matthew Longhurst Partner info@autumncapital.com
Axon Partners Andrew Kellett Partner andrew.kellett@axonpartners.biz
Axonia Partners Alexandre Alfonsi Partner contact@axonia-partners.com
Azla Advisors David Waxman Managing Director dwaxman@azla-advisors.com
Boyd & Co Todd Boyd Managing Partner todd@boyco.net
Bluetower Capital Tim Griggs Managing Partner timgriggs@bluetowercapital.com
Breslin AG David Karabelnik CEO karabelnik@breslin.ch
Campbell Lutyens Thomas Liaudet Principal Liaudet@campbell-lutyens.com
Capital Dynamics Olav Koenig Managing Director okoenig@capdyn.com
Capstone Partners David Chamberlain Managing Director dchamberlain@csplp.com
Carta Diem Philippe d’Hémery Managing Principal pdhemery@cartadiem.fr
Champlain advisors Terence M. Crikelair Managing Partner terry@champlainadvisors.com
Cogent Partners Bernhard Engelien Managing Director bengelien@cogent-partners.com
Continental Capital Partners Roger Luscombe Managing Partner roger@dealmaker.co.uk
Credit Suisse Group Mike Custar Director mike.custar@credit-suisse.com
Fidequity Francois Garcin Partner francois.garcin@fidequity.com
Global Finance Matthias Stanzel Managing Director stanzel@globalfinance.de
Greenhill & Co. Patrick S. Dunleavy Managing Director pdunleavy@greenhill.com
Griffin Private Equity Group Paul Delaney Managing Director pfd@go2griffin.com
Appendix - 134 -

Houlihan Lokey Paul Sanabria Managing Director
Lancea Partners Pascal Isbell Partner pascal@lanceapartners.com
Lazard
Matrix Group Edward Holdsworth Partner edward.holdsworth@ matrixgroup.co.uk
1
Mercury Capital Advisors Enrique Cuan Managing Partner
MHT Partners Secondary Advisors James Lee Principal jlee@mhtpartners.com
Mummert & Company Harald Maehrle Managing Partner info@mummertcompany.com
Nakatomi Capital Monica Vinje Managing Partner mv@nakatomi-capital.com
Palomar Corporate Finance Markus Kroll Partner kroll@plmr.com
Park Hill Group Lawrence Thuet Managing Principal thuet@parkhillgroup.com
Patronus Capital Paul Delaney Managing Director pdelaney@patronuscap.com
plurisvaluation Espen Robak President erobak@pluris.com
Preqin Mark O'Hare Managing Director mohare@preqin.com
Probitas Partners Kelly DePonte Parner kkd@probitaspartners.com
Rainmakers Partners Jim Soleymanlou Managing Partner jsoleymanlou@rainmakerspe.com
Richmond Park Partners David Morton Partner david.morton@richmondparkpartners.com
Rothschild
Roux Capital Francois Roux Managing Principal francois.roux@rouxcapital.com
Scalar Partners Nick Hatch Vice President nick.hatch@scalarpartners.com
Secondcap Francois Gamblin CEO francois@secondcap.com
2
Setter Capital Simren Desai Associate sim@settercap.com
Somerset Capital James Miller Managing Partner james@som-cap.com
The Camelot Group International info@thecamelotgroup.com
Triago Mathieu Dréan Managing Principal md@triago.com
UBS Private funds Group Nicolas Lanel Executive Director nicolas.lanel@ubs.com
1. Spin Out of the Merrill Private Placement team

2. Only Brokerage
Source: Author’s own- Dow Jones; «Guide to Secondary Market Intermediarie.»; 2009 – Companies websites
Appendix - 135 -
1.2 Database of the legal advisers

SJberwin Nigel van Zyl Partner nigel.van.zyl@sjberwin.com
Goodwin Procter Rufus C. King Partner rking@goodwinprocter.com
Wilmer Cutler Pickering Hale and Dorr Thomas A. Beaudouin Partner thomas.beaudoin@wilmerhale.com
Fried Frank Richard I. Ansbacher Partner richard.ansbacher@friedfrank.com
Covington & Burling Hilary Prescott Partner hprescott@cov.com
Debevoise & Plimpton David J. Schwartz Partner djschwartz@debevoise.com
O'Melveny & Myers John Daghlian Partner jdaghlian@omm.com
Weil, Gotshal & Manges Shukie Grossman Partner shukie.grossman@weil.com
Kirkland & Ellis Michael D. Belsley Partner michael.belsley@kirkland.com
Kaye Scholer Emanuel S. Cherney Partner echerney@kayescholer.com
Appendix - 136 -
1.3 Database of the private marketplaces

IlliquidX Zachary Latif Partner info@illiquidx.com
ICAP Alternative Investment Group Laura Prager Managing Director laura.prager@us.icap.com
NYPPEX MaryAnn Sapione Vice President msapione@nyppex.com
1
SecondMarket J. Bollerman Director jbollerman@secondmarket.com
Trusted Insight info@trustedinsightinc.com
2
PEFOX Kishore Kansal Managing Partner kishore.kansal@pefox.com
1. Biggest marketplace for Limited partnerships

2. Marketplace to negotiate derivatives on funds
Appendix - 137 -
2. Database of the buyers in the Private Equity secondary market

2.1 Database of the dedicated secondary buyers (LPs interest and direct)
A.U.M ($m) dedicated to
Company secondaries Name Position Mail Comments
Lexington Partners 15,900 Marshall Parke Partner mwparke@lexpartners.com
Goldman Sachs Private Equity Group 12,000 chris Kojima Managing Director chris.kojima@gs.com
HarbourVest Partners 10,000 Peter Wilson Managing Director pwilson@harbourvest.com
Coller Capital 8,400 Sebastien Burdel Principal sebastien.burdel@collercapital.com
Credit Suisse Strategic Partners 8,200 Stephen Can Managing Director stephen.can@credit-suisse.com
Landmark Partners 6,700 Ian Charles Principal ian.charles@landmarkpartners.com
Partners Group 6,000 Marc Weiss Partner marc.weiss@partnersgroup.com
AlpInvest Partners 4,644 Philip Viergutz Investment Manager philip.viergutz@alpinvest.com
AXA Private Equity 5,000 Olivier Decannière Managing Director olivier.decanniere@axa-im.com
Pantheon Ventures 4,600 Elly Livingstone Partner elivingstone@pantheonventures.com
Paul Capital Partners 4,400 Guy Rico Partner grico@paulcap.com
Adams Street Partners 3,500 Gregory J. Holden Partner gholden@adamsstreetpartners.com
Pomona Capital 3,000 Mark McDonald Principal mmcdonald@pomonacapital.com
Neuberger Berman 2,800 Brian Talbot Managing Director brian.talbot@nb.com
LGT Capital Partners 2,750 André Aubert Principal andre.aubert@lgt.com
Greenpark Capital 1,589 Matthew Arkinstall Investment Director arkinstall@greenparkcapital.com
AIG PineStar Capital 1,800 Harvey Lambert Managing Director harvey.lambert@aig.com
Liquid Realty Partners 1,500 Jeff Giller Chief Investment Officer jeff@liquidrealty.com Only Real Estate
Morgan Stanley Alternative Investment Partners 1,500 John Wolak Managing Director john.wolak@morganstanley.com
SVG Advisers 1,222 Sam Robinson Director sam.robinson@svgcapital.com Listed PE vehicle
Fondinvest Capital 978 Charles Soulignac CEO c.soulignac@fondinvest.com
JP Morgan Asset Management 1,060 Jarrod Fong Portfolio Manager jarrod.fong@jpmorgan.com
Arcis Group 917 Henri Isnard Managing Partner hisnard@arcisgroup.com
Hamilton Lane 1,000 Tom Kerr Principal tkerr@hamiltonlane.com
RREEF Private Equity 775 Charles Smith Managing Director charles.f.smith@rreef.com
Montauk Triguard 750 Edgar J. Pfohl Principal ed@montauktriguard.com
VCFA Group 730 Dayton T. Carr Founder carr@vcfa.com
Newbury Partners 702 Richard Lichter Managing Partner lichter@newbury-partners.com
Appendix - 138 -

Millennium Technology Ventures 700 Dan Burstein Managing Partner burstein@mtvlp.com
PEIFunds 684 Chuck Stetson Managing Director cstetson@peifunds.com
Auda Private Equity LLC 600 Thimothy Brody Managing Director brody@auda.com
JP Morgan Private Equity Limited 544 Troy Duncan Managing Director troy.duncan@jpmorgan.com Listed vehicle
Permal Capital Management 575 Robert DiGeronimo Managing Director rdg@permal.com
Willowridge Partners 535 Jerrold Newman Managing Member jnewman@willowridge.com
Industry Ventures 500 Justin Burden Principal justin@industryventures.com
Unigestion 279 Hanspeter Bader Managing Director hpbader@unigestion.com
Madison International Real Estate 300 Michael Siefert Managing Director inquiries@madisonint.com Only Real Estate
Headway Capital Partners 244 Christiaan de Lint Founder and Partner christiaan@headwaycap.com
Vintage Investment Partners (Ex Vintage Ventures) 225 Abe Finkelstein General Partner abef@vintageventures.com Only Israeli funds
Beleveron Real Estate Partners 200 Paul Oldland Managing Director info@belveronpartners.com Only Real Estate
RCP Advisors 200 Tim Danis Senior Managing Principal timdanis@rcpadvisors.com
Symmetry Investment Advisors 171 Marshall Greenwald Principal mgreenwald@symmetryfunds.com
BEX Capital 122 Benjamin Revillon Managing Partner revillon@bexcapital.com
Anchor Capital 100 Jens A. Wilhelmsen Managing Partner jaw@anchorcapital.co.uk
Cubera Private Equity 100 Jørgen Kjærnes Managing Partner jk@cubera.no
Nottingham Capital Management 100 Michael T. Pilson Managing Partner mtpilson@ncmpartners.com Raising 1st fund
NorgesInvestor 37 Dylan Wolff Managing Director dw@norgesinvestor.com
Gutmann Group 32 Friedrich Strasser Partner friedrich.strasser@gutmann.at
MidCoast Capital 12 Michael Cuneo Managing Partner mcuneo@midcoastcapital.com
The Aldenwood Group Jamie Hale Managing Partner info@aldenwood.com
Ant Global Partners Shunsa Hayashi Managing Director info@agp.sg Focus on Asia
Capital Dynamics David Woolford Managing Director dwoolford@capdyn.com
Hollyport Capital John Beatty Chairman jbeatty@hollyportcapital.com
TMT Capital Partners Thomas M. Turmell Managing Partner tturmell@tmtcapital.com
Live Oak Secondary Harbert Mulherin Managing Partner harbert@liveoaksecondary.com
Performance Equity Management Charles Froland CEO cfroland@peqm.com
TOTAL 117,974
Source: Author’s own- Dow Jones; «Guide to Secondary Market Buyers»; 2009 – Companies website
Appendix - 139 -
2.2 Database of the dedicated secondary buyers (only direct transactions)

Vision Capital 2,444 Alister Wormsley Managing Partner alister.wormsley@visioncapital.com
Saints Capital 1,300 Ken Sawyer Managing Director ken@saintsvc.com
W capital partners 1,100 David Wachter Managing Director dwachter@wcapgroup.com
Protostar Partners 1,000 Joseph Haviv Managing Partner joe@protostarpartners.com
Nova Capital Management 880 Michael Kelly Managing Director m.kelly@nova-cap.com
Verdane Capital Advisors 489 Bjarne Lie Chief Investment officer bjarne.k.lie@verdanecapital.com
Lake Street Capital 400 Gretchen Knoell General Partner gknoell@lakestreetcapital.com
Tempo capital partners 269 David Tate Managing Partner annette.schneider@tempo-cap.com
Omega funds 250 Otello Stampacchia Managing Director os@omegafunds.net Only healthcare companies
Heidelberg Capital 122 Martin Weiblen Managing Partner kontakt@hdcpe.de
Annex Capital 131 mail@annexcapital.com
Endeavor Capital Management 120 Anthony Buffa Managing Partner abuffa@endeavorcap.com
Accretive Exit Capital Partners 110 Andrew Reilly Managing Director reilly@accretiveexit.com
SMAC Partners 100 Dietrich Ulmer Managing Partner dulmer@smacpartners.com
Azini Capital 88 Michael Bennett Managing Partner michael.bennett@azini.com
Shackleton Ventures 55 Michael Low Partner michael.low@shackletonventures.com
Morning Street Capital 20 Paul Misir Managing Partner pmisir@morningstreet.com
Chamonix Private Equity Jane Crawford Managing Partner jane.crawford@chamonixpe.com
Cipio Partners Tom S. Anthofer Managing Partner tanthofer@cipiopartners.com
Mustang Capital Partners Parker Brophy Managing Partner parker.brophy@mustangcapital.com
S1 Capital Partners David Baum Managing Partner dwbaum@s1capitalpartners.com
Preferred equity and
mezannine financing to PE
17Capital Pierre-Antoine de Selancy Managing Partner selancy@17capital.com portfolio owners
TOTAL 8,878
Source: Author’s own- Dow Jones; «Guide to Secondary Market Buyers»; 2009 - Companies website
Appendix - 140 -
2.3 Database of firms investing part of their funds in the secondary market
Portfolio Advisors LLC 1,100 Paul R. Crotty Managing Director pcrotty@portad.com
Stepstone Group 800 Tom Keck Chief Investment Officer tkeck@stepstonellc.com
SL Capital Partners 340 Patrick Knetchi Investment Director patrick_knetchi@standardlife.com
Altamar 244 José Luis Molina Partner jmolina@altamarcapital.com
Key Capital Corp 250 Bart Shirley Managing Director bshirley@kppinvest.com
VenCap International 250 Tim Cruttenden Director tim.cruttenden@vencap.com
Venture Investment Associates 250 Cliff Gilman Managing Director cgilman@viafunds.com
Wilshire Private Markets Group 237 Amanda Ulczynski Associate aulczynski@wilshire.com
Thomas Weisel Asset Management 200 Clifford Meijer Managing Partner cmeijer@tweisel.com
Northen Trust Corp 200 Brad Dorchinecz Vice President bmd3@ntrs.com
AGF Private equity 147 Christophe Simon Investment Manager christophe.simon@agfpe.com
Kensigton Capital Partners 100 Tom Kennedy Managing Director tkennedy@kcpl.ca
Fort Washington Capital Partners 85 Stephen Baker Managing Director steve.baker@fortwashington.com
Altius Associates 75 Garth Troxell Partner gartht@altius-associates.com
Montagu Newhall Associates 75 Ashton Newhall General Partner ashton@montagunewhall.com
LLM Capital Partners 73 Frederick Moseley Managing Director rmoseley@llmcapital.com Only directs
Abbott Capital Management 72 Charles van Horne Managing Director cvanhorne@abbottcapital.com
Paragon Partners 61 Edin Hadzic Managing Partner eh@paragon-partners.de Only directs
Access Capital Partners Philippe Poggioli Managing Partner ppoggioli@accesscp.com
ACP Investment Group trading@acptrs.com
Aldius Capital Saul Meyer Managing Partner info@aldusequity.com.
Allianz Private Equity Partners Claus Zellner Managing Director claus.zellner@apep.com
Alpha Associates AG Peter Derendinger CEO peter.derendinger@alpha-associates.ch
Amundi Private Equity Funds Richard Dalaud Manager richard.dalaud@amundi.com
Appendix - 141 -

Arcano Capital Vanessa Campion Analyst vcampion@arcano.es
ATP Pivate Euqity Partners Torben Vangstrup Partner tva@atp-pep.com
Aviva Investors Nick Mansley Director nick.mansley@avivainvestors.com Only Real Estate
Barclays Private Equity Paul Goodson Managing Director paul.goodson@barcap.com
Bay Hills Capital Albert Chiang Partner achiang@bayhillscapital.com
Blue Capital vertrieb@wealthcap.com Only directs
California State Teachers Retirement System Set Hall Portfolio Manager shall@calstrs.com
Calpers
Canada Pension Plans Mark Wiseman csr@cppib.ca
Carlyle Group
Centinela Capital Partners Robert D. Taylor Partner admin@centinelacapital.com
CMS Fund Advisors Inc. William A. Landman Principal wal@cmsco.com
Danske Private Equity John Danielsen Managing Partner jd@danskeprivateequity.com
DuPont Capital Management Carmen Gigliotti Managing Director carmen.gigliotti@usa.dupont.com
F&C Private Equity Hamish Mair Diirector info@fandc.com
Finama Private Equity info@finama-pe.fr
Frontiers Capital Partners Herman Spruit Managing Partner info@frontierscapital.com
Guggenheim Partners Amit Dabas amit.dabas@guggenheimpartners.com Interest in India funds
Hovde Private Equity Advisors Joseph Thomas Managing Director jtomas@hovde.com
Horsley Bridge Partners Dan Reeve Managing Director dan@horsleybridge.com
Invesco Private Capital Phillip M. Shaw General Partner phil_shaw@invesco.com
Itaventure Capital Partners Michele Gardelli Managing Director privateequity@itaventure.it
Macquarie
MSD Capital Glen R. Fuhrman Managing Partner investments@msdcapital.com
Appendix - 142 -

Natixis Private Equity Jean Duhau de Berenx CEO jean.duhau@natixis-pe.com
New Jersey State Investment Council Maneck Kotwal Investment Officer maneck.kotwal@treas.state.nj.us
Northsea Capital Patrik Nevsten Partner patrik.nevsten@northseacapital.com
Oak Hill Jeffrey M. Mills Principal jmills@oakhillcapital.com
Ontario Teachers Pension Plan Erol Uzumeri Senior Vice President teachersprivatecapital@otpp.com
OPSEU Pension Trust
Parish Capital Charles Merritt Managing Partner cmerritt@parishcapital.com
Pathway Capital Management Philip Godfrey Director philipgodfrey@pathwaycapital.com
PCG Asset Management Michelle Davidson Managing Director pcg@pcgfunds.com
Quay Partners Stephen White Managing Partner quaypartners@quaypartners.com.au
Rho Capital Partners Gordon Hargraves Partner ghargraves@rho.com
Robeco Capital Henk Saeijs Partner private.equity@robeco.nl
Susquehanna International Group garrett.allen@sig.com
Teacher Retirement System of Texas
Triginta capital Clemens von Berger CEO cvberger@avida-group.com Only directs
Turan Corporation Robert Towler Partner rtowler@turancorp.com Emerging market
Von Braun & Schreiber Private Equity Partners Timothy J. Reynolds Managing Director timothy.reynolds@braunschreiber.com
Hermes Private Equity Andrew Raisman Director andrew.raisman@hermes.co.uk Only Directs
Institutional Venture Partners Tod Chaffee General Partner tchaffee@ivp.com Only directs
Ventizz Capital Partners Helmut Vorndran CEO h.vorndran@ventizz.de Only directs
Bregal Investments management@bregal.com
Conversus capital ccap@conversus.com Listed PE vehicle
Nordea Private Equity private.equity@nordea.com
Source: Author’s own- Dow Jones; «Guide to Secondary Market Buyers»; 2009 - Companies website
Appendix - 143 -
3. Request for sponsorship

Appendix - 144 -
4. Newsletter nº1
Appendix - 145 -
Appendix - 146 -
5. Sponsors of the study and interviews

Company Agent type Contact Position Mail Comment
1. UBS Private funds Group Adviser Stéphane Vojetta Executive director stephane.vojetta@ubs.com IBD Team
Nicolas Lanel Executive director nicolas.lanel@ubs.com Call on 19th January 2010. Meeting 3rd March 2010 at 14:00
Francesca Paveri Analyst francesca.paveri@ubs.com Meeting 3rd March 2010 at 14:00
Conf call on 26th Nov. 2009 15H00 UK Time. Other call
made in December. Call on 19th January 2010. Call on 8th
Jasmine Hunet Analyst jasmine.hunet@ubs.com March 2010. Model and sale structures comments
2. Arcano Capital Buyer Vanessa Campion Analyst vcampion@arcano.es Meeting on 18th March 2010 18:00
Steve Sceery Vice President ssceery@arcano.es Meeting on 18th March 2010 18:00
Ricardo Miró-Quesada Associate rmiro@arcano.es Meeting on 18th March 2010 18:00
3. Fidequity Adviser Francois Garcin Partner francois.garcin@fidequity.com

Christophe Tymen Partner christophe.tymen@fidequity.com Conf. call on 3rd December 2009 16:00 UK time
Amit Sanghvi Associate amit.sanghvi@fidequity.com Conf. Call 3rd December 2009 16h00 UK Time
4. Breslin AG Adviser David Karabelnik CEO karabelnik@breslin.ch Call on Wednesday 02nd Dec. 2009 at 10:00 AM
5. Headway Capital Partners Buyer Christiaan de Lint Founder and partner christiaan@headwaycap.com Call Wednesday 9th Dec. 2009 17:00
6. Preqin Adviser Mark O'Hare Founder and Managing Director mohare@preqin.com

Kerry Pogue Head of research kpogue@preqin.com Call on Wednesday 2nd Dec. 2009.
7. Campbell Lutyens Adviser Thomas Liaudet Principal Liaudet@campbell-lutyens.com

Call Thursday 10th Dec. 2009 15:30 (UK time). Call on the
Julien Marencic Vice President marencic@campbell-lutyens.com 10th March 2010 at 14:00 UK time. Comments on model
8. Altamar Buyer José Luis Molina Principal jmolina@altamarcapital.com Meeting Monday 07 Dec. 2009 17:00
Ignacio de la Mora Senior Associate idelamora@altamarcapital.com Meeting Monday 07 Dec. 2009 17:00. Model comments
9. Pantheon Ventures Buyer Francesco Di Valmarana Principal Call on Wednesday 09th Dec. 2009 13:00 UK Time
Arantxa Prado Senior Associate aprado@pantheonventures.com Call on Wednesday 09th Dec. 2009 13:00 UK Time
10. Secondmarket Marketplace Jeffrey C. Bollerman Director LP interest jbollerman@secondmarket.com Call Tuesday 01st Dec. 2009 at 21:30
11. SJberwin Legal adviser Isabel Rodriguez Partner isabel.rodriguez@sjberwin.com Meeting on Monday 14th Dec, 2009 17:30
Roberto Pomares Botana Partner roberto.pomares@sjberwin.com Meeting on Monday 14th Dec. 2009 17:30
12. Lexington Partners Buyer José Sosa del Valle Senior Associate jsosadelvalle@lexpartners.com Call on 15th and 20th of January 2010
13. HarbourVest Partners Buyer Peter Wilson Managing Director pwilson@harbourvest.com Call on 9th March 2010, 14:00 UK time
Appendix - 147 -
6. Meeting guidelines
Meeting guidelines
1) Presentation:
a) The project: Thesis, Model, sponsors.
b) Company profile: Leading buyer on the secondary market, AUM, targeted assets
(size, funding ratio), funds, last closed operations, sourcing of transactions.
2) Market insight:
a) Could you send me historic data of primary and secondary fundraising?
b) What was the transaction volume on the market from 2000 to 2009?
c) Correlation between primary fundraising and secondary transaction volume
(turnover rate, average age of funds sold)?
d) How do you see the future of the market? (Tightening of the Bid/Offer spread,
Growth, correlation between primary and Secondary PE market)
e) Nowadays who are the main sellers on the market? And what is their main reason to
sell?
f) What about the pricing? (Current and outlook)
g) Could you describe a classic transaction process? Obama bank project: Citi deal
($10bn on the sec. market), potential buyers. Will JP Morgan sell its PE unit? $8bn?
Will it occur this year? Goldman will give up bank status? Other banks plan to sell
h) Which advisers do you work with?
i) What are the typical fees of advisers on the market?
3) Structuring of the operations:

a) What are the different possible structures on the market?
b) In case of a structured operation (JV) do you consider the counterparty risk as an
issue?
4) Valuation Issues:
a) Could you describe your valuation method of this asset class? (Bottom-up/Top-
down?) Multiples.
b) What are the returns and IRR you are looking for?
c) How do you project the unfunded commitment? (In order to project cash flows)
Appendix - 148 -
d) Are listed Investment trusts a good proxy for valuation?

e) What are the main components of the value of a secondary asset? (Funding ratio,
Growth of underlying, exit timing…)
5) Legal issues:
a) What are the legal issues when considering buying/selling a LP stake? (pre-emption
rights, indemnifications…)
b) Does a GP have a right to veto the transfer of a limited partnership interest in a fund?
Other: Review and comments of the model

Appendix - 149 -
7. Summaries of calls and meetings
This part contains the summary of the various meetings, calls that have allowed me to
gain much information of this study. These summaries are in chronological order. Three
other investment funds shared their thoughts with me but asked to remain anonymous. All
errors are mine.
7.1 Call with UBS (26 November 2009)
Call UBS 26th November

Contact: Jasmine Hunet (UBS Private Funds Group – Secondary Market Advisory, Analyst)
When: 26th November, from 16h15 to 17hoo
Subject: Valuation issues, modelling and structuring of operations
Content:
1. Pricing / Valuation
a) Secondary Buyers’ Target Returns
All depends on each buyer’s cost of capital, but when modelling, we generally assume that a
typical secondary buyer looks for a 1.8x-2.0x return multiple and a 20%+ IRR. These target
returns are adjusted when modelling non vanilla sale structures which have different risk
profiles.
b) Capital Calls & Distribution Profile
You need to project the future capital calls/distributions profile for your portfolio. The
profile mainly depends on (i) remaining unfunded to be called, expected return on NAV and
expected return on unfunded (ii) timing of capital calls & distributions.
Historical returns data sourced from the “VentureXpert” database can be used to project
return multiple and timing.
c) Consideration Relative to the Unfunded Commitment:
The return multiple assigned to the unfunded part of a commitment mainly depends on the
overall economic outlook, quality of the GP (track record, team stability …) as well as on the
expected use of the unfunded (new investments vs. follow-on investments…).
Appendix - 150 -
d) Considerations Relative to Management Economics
To model the carried interest, you have to do it step by step

1. Hurdle rate or preferred return to LPs is around 8%
2. Then there is a catch up for the GP
3. Lastly profit is shared between LPs and GP (80/20% for a 20%
carried interest)
There are two different ways of computing the carried interest

- US: Deal by deal
- EMEA: Calculated at the overall fund level
2. Structuring Alternatives
Different sale structures can be used to sell a portfolio of LP interests:
- Straight sale: Plain vanilla sale. In current market conditions, discounts are still
substantial (approx.: 30/40% discount) for average quality buyout funds
- Joint-Venture Sale, used to minimize discount. The assets are placed into an SPV owned
by seller and buyer. The distribution waterfall is then negotiated (and is often
asymmetric)
- Seller financing: The seller finances part of the price paid by the buyer via a loan of (for
example approx. 30% of the price). You can add a mechanism of “revolver” to cover
capital calls as well.
- Listing of the Portfolio. Not used today because of market conditions
- Securitization. Not used today either.
Appendix - 151 -
7.2 Call with Secondmarket (01 December 2009)
Call Secondmarket 01st December

Contact: Mr Jeffrey Bollerman (Head of Limited Partnership Interests Marketplace, New
York)
When: 01st December, from 09:30PM to 10:15PM
Subject: Marketplace for illiquid assets.
Content:
1. Company Profile
Secondmarket is the largest independent marketplace and auction platform for
illiquid assets with over 4,000 participants and height asset class traded on its online
platform.
Secondmarket is a fast growing company providing intermediary services. It competes with

every other intermediary. Other online platforms as Preqin (more based on research
publication) and NYPPEX (which seems to be quite absent on the market nowadays) are
smaller than Secondmarket.
They do not provide advisory on any of those transactions and can offer a low cost
intermediary service. Instead of all Investment Banks and Boutiques, Secondmarket
positions itself as a fast growing company on a low-cost model based only on intermediary
services. It employs 100 people.
2. The LP Interest market:

a. Size of the market, growth rate:
With nearly $2bn in LP interests listed, Secondmarket is the largest marketplace of LP
interest in Private Equity, Venture capital, Funds of funds and Hedge funds. Mr Bollerman
could not give me the actual growth of the market because of the confidentiality of this
information but he told me it was an exceptional fast-growing market.
b. Sellers on the market, reasons to sell

Sellers are mostly financial institutions in terms of transaction volume, but are also
endowments, Corporations, high net worth individuals, pension funds…
Appendix - 152 -
The main reason to sell is to rebalance the portfolio because of change in the strategy, poor
results, denominator effect… Also many sellers are in distressed situation.
c. Pricing on the market

Mr Bollerman could not tell us the actual discount on the market because of
confidentiality but also because it depends on each asset.
For him the unfunded is the major determinant of the pricing. Also quality of GPs and of
underlying assets are other determinants.
3. The process on the market:

Participants enter online on the market and meet anonymously on the platform.
Once they have agreed on deal conditions (price, other conditions), they get identified and
they close the deal.
Fees depends on the sale proceeds, they are generally around 3%. If the transaction price is
too low to cover fixed cost of the platform, then other fees are added.
Appendix - 153 -
7.3 Call with Breslin AG (02 December 2009)
Call Breslin AG 02nd December

Contact: Dr. David Karabelnik (CEO Breslin AG)
When: 02nd December, from 10:00AM to 11:00AM
Subject: Market insight, transaction process.
Content:
1. Why this market is a hidden-market

Two reasons justify why this market is hidden:
- It is a New Market: The PE secondary market is all new. Since 2002/2003, the market
exploded with much more deals and fund raised. Nowadays it is considered as an
established market but because of the wide spread between Bid and offer it remains
inefficient.
- It is a Private Market: Agents working on this market do not want it to become
public. It is a secret market; people do not want their assets to be known as on sale.
Confidentiality is a key for success on the market. That is why agents always sign
CDAs (Confidential Disclosure Agreements).
2. About Mr Karabelnik and his company Breslin AG:

Mr Karabelnik is a Doctor in Biochemistry; he first began as an entrepreneur in
Biotech. In 1999 he came back from San Francisco with a background in Venture Capital. He
met Dresdner Bank and decided to set a vehicle with them to invest in Venture Capital.
For this purpose, he founded a Joint-Venture with Dresdner: Breslin Biotech.
In 2003, after the bubble crisis, the Private Equity secondary market began to grow because
of concerns from banks to go out from this asset class. At this time Dresdner sold a portfolio
of VC and PE assets (mainly to Axa and Harbourvest).
Mr Karabelnik then brought part of the Dresdner team to Breslin AG and they began working
on secondary transactions with a focus on buyers in 2004.
They quickly realized fees where much better working for sellers. That is why in 2005, they
began going out on the market and look for sellers.
Their clients include many big companies such as Bayer, Henkel, Roche…
Appendix - 154 -
In those big companies the realisation of transactions is easier because they are not so much
price-sensitive and accept discounts of the market.
Breslin is an intermediary and an adviser on the market more focused on Venture Capital.
Valuation advices are mainly based on the current discount to NAV of the market.
3. Market insight:
a. Pricing on the market:

The market is clearly offering large discounts to NAV. In the peak of the crisis
discounts were up to 50/60%. But now things are coming back and discount is tightening, it
will now be around 40% of the existing NAV.
The gap between bid and offer is likely to tighten because of the amount of money on the
market. Buyers are sitting on large amounts of money and are likely to invest it revising their
pricing. For example Mr Karabelnik during a process did not accept a bid from a fund and 6
months later the bidder came back with a revised and more acceptable price for the same
asset.
b. Size of the market:

There are clearly a lot of people who want to sell and a lot of money raised by buyers.
Mostly transactions led by Mr Karabelnik are likely to realize between 6 weeks and one year.
When Breslin goes on the market to find asset for sale he contacts 50 potential sellers, get
10 closest conversations and finally sign an exclusive agreement with 3 to 4 sellers. They get
c.5-10% of the potential sellers.
4. The transaction process:

- Go on the market to find sellers: Advice them on value (give them price range).
- Sign an exclusive sale agreement
- Get all the info (financials, LPAs…)
- Sign a CDA with GPs to allow communication
- Go on the buyer market and pitch clients. Database of c. 200 buyers. At this stage of
the process Seller and Assets are not disclosed.
- Sign a CDA with interested buyers to provide them with more information
- Auction of asset
- Negotiation with Breslin to agree on a price
- Closing: Sign sale and legal agreements.
Fees are based on success fees of c. 3,5-5% of the transaction value with addition of
retainers for sale of direct investments of c.4,000 to 5,000€/month because of the
complexity of the work.
Appendix - 155 -
7.4 Email from Preqin

Preq (02 December 2009)
Mail Preqin 02nd December

Contact: Kerry Pogue (Head research Secondary PE market)
When: 02nd December, by mail to replace a call
Subject: Market insight.
Content:
1. Preqin Company profile:

a. Activity:
There has been some talk recently regarding online exchanges and the scepticism
around them. We do not aim to do this. We aim instead to provide an information service
and network to help inform buyers, sellers and advisors, and to bring them closer together.
togeth
Preqin’s secondary market monitor service creates leads for buyers and sellers in two ways.
Firstly, we call investors to find out their secondary market plans and then we provide this
information in the form of a database.
Secondly, we have created a confidential network whereby sellers of fund interests can
come anonymously to the service and submit fund interests for indicative valuations, both
from Preqin’s algorithmic model and from third party buyers subscribed to our service. A
buyer can submit a rough price indication and make initial contact with the seller but any
transaction is not completed through Preqin’s service. It is completed between the buyer
and seller externally.
b. Competitors
Other participants in the market are Secondmarket, Investor
Investor Flow and some other
online trading platforms (often initially set up for the trading of hedge fund interests) which
have begun to look at adding private equity fund interests to the assets they trade.
However, as far as I know, we are the only service toto offer free pricing indications. NYPPEX
acts as our exclusive pricing partner and guarantee to provide price indications to anyone
that submits a portfolio for third party price indications. We do not provide advice on the
secondary market. Rather, we provide
pro information and data.
2. Valuation method: A proxy to Listed FoF’s

With regards to the online algorithm, we have demonstrated a correlation between
listed private equity and secondary market pricing and therefore use listed private equity as
a proxy and take the following into consideration: type of fund; vintage year of fund; fund
manager track record; fund performance; amount of capital called. We also assess market
trends and factor these in accordingly.
Appendix - 156 -
We feel that while this method cannot be substituted for a thorough due diligence of the
fund’s underlying assets, it does give a good general indication of the fund interest’s
approximate worth on the secondary market and we have received lots of good feedback
regarding the accuracy of the indications. I’m unable to go into any more depth with an
explanation of the model, unfortunately.
3. Market insight:
The research report which will be released next week freely on the website will cover
this point.
4. who are the main sellers and why:
a. Reasons to sell:
I would say there are two types of reasons for selling fund interests: a) liquidity
requirements b) strategic purposes.
Strategic purposes would include rebalancing investment portfolio, reducing administrative

burden, gaining exposure to top managers that the LP may have missed in the primary round
of commitments etc.
b. Who are the main sellers:

I would say that all LPs could benefit from selling for strategic purposes, providing the
prices are right, but there are a few firm types that are particularly susceptible to selling,
mainly for liquidity requirements.
Endowments: ‘a closed box’, with no income and they often employ an over commitment
strategy. A decrease in distributions from fund investments has therefore hit them
particularly hard.
Banks: Banks tend to enter and leave the PE market in cycles. For example, one secondaries
manager has purchased portfolios from the same bank 3 times over the past 15 years. In
order to generate liquidity, banks have been keen to offload illiquid assets including private
equity fund interests. Furthermore, many banks were initially attracted to the private equity
market by the opportunity to provide finance in the form of leveraged buyout deals.
However, the financial turmoil of 2008 rendered them unable to fulfil the role of financier,
prompting many to reduce their exposure to an asset class that never did form a core part of
their investment strategies.
Listed FOFs: another closed box until they issue additional securities. Again, they employ an
over commitment strategy and have probably borrowed too much. They’re a good indication
for the volume of selling we should expect and their selling activity is generally well-
documented as a result of their public status.
Appendix - 157 -
7.5 Call with Fidequity (03 December 2009)
nce call Fidequity 03rd December

Conference
Contact: Mr Christophe Tymen (Partner) and Mr Amit Sanghvi (Associate)

When: 03rd December, from 5:15PM to 5:45PM
Subject: Valuation, structuring, legal.
Content:
1. Fidequity company profile
Fidequity is an adviser in Private Equity which mainly focuses on Secondary
operations and fundraising.
It is a global group with offices in London, Paris and New York.
2. Valuation issues
In general the GP do not release enough information in its financial reports to value
each underlying asset.
In this case, the valuation process is to make a market valuation. Depending on the Funding
ratio of the fund, the market discount of same vintage funds is used. The market discount is
then applied to the NAV of the fund provided by the GP. The lowest the funding ratio, the
lowest the price because investors do not like backing managers they do not know.
In the case of enough financial information available,
a a bottom-up
up valuation is done valuing
underlying assets. A new NAV is estimated and depending on the capital call/distribution
profile of the fund, cash flows are discounted at the targeted IRR and the NPV is the price
the buyer is willing to pay.. A sensitivity analysis is done on growth assumptions of underlying
assets and Capital Call/distribution profile.
3. Structuring of the operations:

Mainly two structures:
-Straight sale
- Joint venture: Buyer and seller share the economics. The buyer answer all capital
calls but gets a preferred return until he reaches a targeted return, then the distribution is
shared.
4. Legal issues:
It mainly depends in which jurisdiction the fund belongs to. It also depends if the
fund is an FCR or a limited Partnership.
Partnership
Appendix - 158 -
Basically pre-emption rights and remaining liabilities of previous LPs are issues considered
during secondary transactions.
The GP do have a veto right on a secondary transaction of a LP stake in its fund.
A Limited Partnership does not have to pay tax, but the limited partners pay it. It means
there is no double taxation on income. In order to be considered as a Limited Partnership,
you have to prove that your fund is illiquid and not traded on a public place. That is why a
Limited Partnership can’t transfer more than 2% of committed capital each fiscal year
whether it will be considered as a Public traded partnership (and taxation also) by the IRS.
However, by using a qualified service (defined by the IRS) on the secondary market, a fund
can add 8% on the previous percentage of transferable assets.
Appendix - 159 -
7.6 Meeting with Altamar (07 December 2009)
Meeting Altamar 07th December

Contact: Mr José Luis Molina (Partner) and Mr Ignacio de la Mora (Investment Director)
When: 07th December, from 5:00PM to 6:45PM
Subject: Market insight, Valuation, legal, structuring, modelling.
Content:
1. Altamar company profile

Altamar is a Private Equity fund of fund founded in 2004. Altamar currently has three
funds and asset under management of approx. € 1bn. invested mainly in LBOs (80% of AUM)
and Real Estate (20% of AUM). Its funds have a capacity to invest until 20% of committed
capital in secondary transactions.
Recently they opened a new fund dedicated to secondary operations. This fund only invests
in funds Altamar already invested in on the primary market. They use to invest in early
secondary (50/60% funded) looking for 2x returns.
2. Market insight
The size of the secondary market is really difficult to determine, however it seems
that the volume of transaction was c. $16 bn. in 2008 and c. $4 bn. in H1 2009. For Mr
Molina, no clear correlation exists between the primary Private Equity market and secondary
transactions because each market relies on different drivers.
Main reasons of selling were distressed situations and the denominator effect. Today the
denominator is no longer a reason because boards voted to lift threshold of the Private
Equity allocation and also because large pension funds forced GPs to write-down their NAV.
Today sellers are mostly listed fund of funds (because of over commitment strategy and high
leveragebreaching of covenants) and family offices (mainly distressed sellers).
They believe the tightening of the bid/offer spread will happen when the visibility and
macroeconomic conditions will better.
It is a market similar to the Real Estate one because it is a buyer market where agents are
looking to buy quality assets and where sellers are mostly distressed and have to sell with a
discount to the real price of those assets in the future.
Appendix - 160 -
3. Valuation issues
In order to value this asset class, a simple market valuation (applying a discount on
the GP’s NAV) is not a good method. A bottom-up valuation has to be performed in order to
value underlying assets. Underlying is valued via EBITDA multiples; it is not possible to do it
via a DCF method because we need to approach the value of the assets in the time.
A new NAV is estimated and depending on the capital call/distribution profile of the fund,
cash flows are discounted at the targeted IRR and return. The NPV is the price the buyer is
willing to pay. A sensitivity analysis is done on growth assumptions of underlying assets and
exit timing.
The cash is not an issue because it is always an insignificant part of the fund and usually the
final price paid for the asset is corrected by the existing cash.
4. Legal issues:
Two most important legal issues:
- Existing legal agreement of the fund: not applicable for Altamar because they only
invest in funds where they already invested in primary.
- The Share Purchase Agreement (SPA)
Particular attention has to be paid if remaining LPs have pre-emption rights (ex:
Blackstone).
GP consent is required in secondary transactions.
Also fiscal issues have to be considered, for example, when buying in the US, if you want to
benefit from the local tax treatment you have to buy a resident vehicle.
5. Structuring of operations:
Altamar only buy assets via straight sale. Structures where the buyer and the seller
share the economics (like JV) are not used because of the risk of bankruptcy. Also for fiscal
reasons because an FCR cannot invest in a structured note; they have to invest in Private
Equity funds if they want to keep their tax treatment.
6. Modelling:
Mr de la Mora reviewed the valuation model. Discussions were on the following
elements:
- Growth assumptions
- Cash flow for debt repayment
- Waterfall
- Management fees/Carried
Appendix - 161 -
7.7 Call with Pantheon Ventures (09 December 2009)
Conference call Pantheon

Ventures 09th December
Contact: Mr Francesco Di Valmarana (Principal) and Mrs Arantxa Prado (Senior Associate)
When: 09th December, from 11:00AM to 12:00AM (UK time)
Subject: Market insight, structuring, Valuation, legal.
Content:
1. Pantheon company profile

Pantheon Ventures is a Private Equity primary and secondary fund-of-funds manager
founded in 1982. Pantheon currently manages approx. $ 23bn. invested mainly on the
primary (80% of AUM) and on the secondary market (20% of AUM).
Pantheon has been a pioneer on the Private Equity secondary market beginning its activities
on this market in 1988. Today Pantheon is the fourth biggest player by assets dedicated to
this market. On the secondary market they mainly invest (85%) in funds where they already
participate in the primary. They use to invest in late secondary (60/70/80% funded).
Generally Secondary funds perform better than Primary in terms of return.
2. Market insight
The size of the secondary market is really difficult to determine, however it seems that
the volume of transaction (Purchase Price + Unfunded) was c. $23,5 bn. in 2008 and c. $5,5
bn. in H1 2009. In 2010 the market is likely to be much more important than in 2009.
Transaction volume should be approx. $30 bn.
Quoted investment trusts give a good proxy for valuation, in 2006-2007, a 5 to 15% premium
to NAV was paid. Pricing on the secondary Private Equity market was very similar. Today
listed investment trusts show a reduction in the discount to NAV, which should be likely to
tighten the gap between the bid and offer on the secondary market.
Players mainly sell on the secondary market for three different reasons:
- Cash flow distressed: It can be every players but it is mainly the case for family
offices.
- Balance sheet issues: Risk capital allocation. Regulation. Banks and insurance
companies.
- Portfolio allocation: Rebalance portfolio, change strategy. Pension funds, insurance
companies and endowments.
Appendix - 162 -
There are two types of classic transaction process depending on where the deal is sourced:
• Deal sourced via an intermediary: The transaction process last mainly 3 months.
- Intermediaries come up with a list of assets and their characteristics
- If the buyer is interested by an asset he makes an initial bid: 1month
- More information is given to the different parties who have to make a final bid:
1month
- Closing of the deal: Legal (SPA,…) 1 month.
• Deal sourced by Pantheon: Same steps as the previous process but is usually a lot
more complicated and longer (can last years).
Typically adviser fees are c.1 to 2% of NAV + Unfunded depending on the size of the
transaction.
3. Structure of transactions
Pantheon mainly buys assets agreeing on a price with differed payments. They have
also used other different structures using SPV and sharing the economics where the
counterparty risk is carefully assessed. Generally deal structures are proposed and accorded
with the seller.
4. Valuation issues
In order to value this asset class, a bottom-up valuation is performed to value the
underlying. Underlying is valued via multiples; it is not possible to do it via a DCF method
because we need to approach the value of the assets in the time.
A new NAV is estimated and depending on the capital call/distribution profile of the fund,
cash flows are discounted at the targeted IRR (20/25% for Pantheon) and return (1,8x to 2x
for Pantheon). The NPV is the price the buyer is willing to pay. A sensitivity analysis is done
on growth assumptions of underlying assets and exit timing.
The unfunded is separated and valued in two parts:
- The part which will be used to back existing investments: This part is projected as per
returns expected of each investment in existing business.
- The capital for new transactions: On this part the return applied is usually bigger.
The cash is not an issue because it is always an insignificant part of the fund however it is
included in the model.
For Pantheon, as a late secondary buyer, the main component of the value of a secondary
asset is the quality of the underlying. For an early secondary the main component would be
the funding ratio.
5. Legal issues:
- Indemnities: In case a GP sold an asset and need to call back distribution.
- Fiscal issues: Tax situation of the vendor, buyer and underlying assets.
- Composition and agreements in the investor base
Appendix - 163 -
Depending of the LPA, the GP can have a veto right.
In the US, the 2% transfer law is applicable to limited partnerships and 8% can be added to
this percentage if the transaction is advised by a Qualified Matching Service (QMS) defined
by the fiscal authorities.
Appendix - 164 -
7.8 Call with Headway Capital (09 December 2009)
Call Headway Capital 09th December

Contact: Mr Christiaan de Lint (Founder and Partner)
Subject: Market insight, Valuation
Content:
1. Headway Capital company profile

Headway Capital is a Private Equity secondary fund-of-funds manager founded in
2004. Headway currently manages two funds totalling c.€ 200 million invested mainly in
Direct secondary (75% of AUM) and in LP Positions (25% of AUM). They specialize in small to
mid-size transactions (<€40m).
2. Market insight
For Mr de Lint a correlation exists between the primary and the secondary market of
around 3 to 5%. However it is difficult to determine its future.
Sellers are cyclical; before it was corporations, then banks and today it is everybody.
Reasons are also changing in the time; before people were selling for portfolio management,
today people are selling for distressed reasons.
3. Valuation issues
underlying. A new NAV is estimated and depending on the capital call/distribution profile of
the fund, cash flows are discounted at the targeted IRR and return (which for Headway are
similar to a primary Private Equity fund). A sensitivity analysis is done on growth
assumptions of underlying assets and exit timing.
The valuation of the unfunded depends on the quality and the reliability of the GP:
- If the GP has a good track record and is likely to make good investments then the
unfunded is not taken into account.
- If the GP is not that good then the unfunded is projected at an inferior return to the
target one in order to penalise the value for the risk taken.
Appendix - 165 -
7.9 Call with Campbell Lutyens (10 December 2009)
Call Campbell Lutyens 10th December

Contact: Mr Julien Marencic (Vice President)
When: 10th December, from 02:30PM to 03:30PM (UK time)
Subject: Market insight, Transaction process, Structuring, Valuation.
Content:
1. Campbell Lutyens company profile

Campbell Lutyens is an advisory firm founded in 1988 focused on Private Equity and
Infrastructure. The company specialises in raising private equity and infrastructure funds
from institutional investors worldwide and in advising on the secondary sale or restructuring
of portfolios of direct or fund investments.
On the Private Equity secondary market it advises on the sale or restructuring of portfolios of
Private Equity fund or direct investments. They recently closed the sale of the European VC
portfolio of 3i and the restructuring and refinancing (c.€200m) of APEN, a listed vehicle
previously affiliated with AIG.
2. Market insight
The size of the secondary market is really difficult to determine, however it seems
that the volume of transaction (Purchase Price + Unfunded) was c. $14/15 bn. in 2008 and
will be around $5/6 bn. in 2009 (apart from sales of single interests). In 2010 the market is
likely to be much more important than in 2009.
The Bid/Ask spread is already tightening but its evolution in the near future will depend on
macroeconomic developments and on the change in NAVs (How GPs mark their investment).
Nowadays the average discount for a portfolio of buyout funds is ca. 20/30%, and can even
be closer to NAV in certain cases.
In 2010 sellers will mainly be Banks and endowments. Indeed, many banks are now focusing
on their core business (and are likely to divest non-core activities) and seeking liquidity (for
instance to repay government’s loans). Endowments should mainly be affected because of
their overcommitment strategy to Private Equity and the denominator effect (Public markets
dropped more than Private Equity NAV).
Reasons for selling are the following:

Appendix - 166 -
- Liquidity concern
- Over-commitment strategy
- Denominator effect
- Change of strategy / Exit of non-core activities
3. Transaction Process
All transactions are unique but most transactions can be divided in 4/5 phases:
1. Preparation Phase: Adviser’s due diligence and preparation of the data room
2. Marketing Phase: An NDA (Non Disclosure Agreement) is signed with each investors
to enable them to access the data room. Investors then review the information
contained in the data room and submit an indicative offer for the assets.
3. Due Diligence Phase: A short list of investors is made and the short-listed investors
get access to more information on the data room so they can refine their due
diligence and submit a binding offer.
4. Negotiation and Closing Phase: The preferred party(-ies) enters in exclusive SPA
negotiations with the seller until the document is signed.
5. (Funds transfer)
Typically adviser fees are c.1,5 to 3,5% of NAV + Unfunded depending on the size and
complexity of the transaction.
4. Structure of transactions
Straight sales are used but also different structures using SPV and sharing the
economics. Economic-swap agreements (in which the legal ownership and economics of the
assets are decoupled) or Top slicing (in which an investor buys a part of each of the vendor’s
LP interests) are also used.
5. Valuation issues
underlying assets. A secondary price is calculated, which depends on the level of undrawn of
the fund, future cash flows are discounted at the targeted IRR (depending of buyers’ cost of
capital, and target IRR marketed to their own investors) to achieve the target MM return
(typically between 1,8x to 2x).
When more visibility on the future use of cash flows is available, the unfunded component
can be separated and valued in two parts:
- The part which will be used to back existing investments: This part is projected as per
returns expected of each investment in existing business.
- The capital for new transactions: On this part the return depends on how the GP
plans to invest it.
Quoted investment vehicles can be used as a proxy to secondary market pricing, bearing in
mind the following caveats:
Appendix - 167 -
- the NAV of a listed vehicle is based on the underlying NAV of the underlying assets
available at the time of reporting (e.g. usually NAV from the previous quarter)
- the share price of listed investment vehicles can be distorted by the lack of liquidity
in the shares and/or the structure of the vehicle itself (such as use of leverage,
overcommitment strategy…).
The value of a secondary asset is mainly driven by its underlying assets: trading activity
(growth outlook), economic environment (entry multiples…), manager’s experience and
reputation, exit market (M&A and IPO); but also by the unfunded part (depending on the
access to investment plans of the GP and on the quality of GPs) and the exit timing.
Appendix - 168 -
7.10 Meeting with SJberwin (14 December 2009)
Meeting SJberwin 14th December

Contact: Mrs Isabel Rodríguez (Partner) and Mr Roberto Pomares (Partner)
Subject: Market insight, legal issues.
Content:
1. SJ Berwin company profile

SJ Berwin is a leading international law firm founded in 1982 delivering legal advice to
financial institutions and international companies. With c. 600 lawyers, SJ Berwin is present
in 12 different countries. SJ Berwin is a leading adviser in the primary Private Equity sector.
They also advise their clients (GPs) and sellers in their client fund on secondary transactions.
As a participant on the secondary market they are also involved on the buy-side.
2. Market insight
They advise on transactions of LP interests but also on synthetic transactions where
the GP is selling a part or an entire portfolio.
The Spanish Private Equity market is really a small market (Biggest fund: Magnum Capital
€850m), secondary operations are reduced and players mainly sell for distressed reasons.
GPs also sell because of poor performance in their portfolio.
Reason to sell is mainly because of distressed situation; however for GPs it can also be to sell
a non performing asset/portfolio. Nowadays for a straight sale, discounts are c.25% of NAV.
3. Legal issues
Basically in a transaction process, lawyers have two major roles:
- To analyse the existing LPA (Limited Partnership Agreement) of the fund:

Indeed at the very beginning of a transaction, the GP or even the seller requires to
understand what are the transfer conditions and possibilities.
Also the potential buyer requires understanding the LPA and will need a summary of
all its conditions and characteristics.
- To redact the SPA (Share Purchase Agreement): The buyer when closing the
transaction will have to redact the adequate legal document transferring assets and
remaining liabilities. This part is much more complicated in the case of a synthetic
sale (GP direct sale) than in a straight sale of a LP interest.
Pre-emption rights: In general funds do not have pre-emption rights in their LPA.
However if they do it is a crucial issue when planning to sell a LP position.
Appendix - 169 -
GPs generally have a right to veto the transfer but they generally do not use it. Indeed they
more often help the LP to find an investor for its interest in order to reduce the risk of a
default in their fund.
In case of a LP default, the GP can generally choose between different options:
- A secondary sale of the LP interest

- A reduction in the LP’s capital account, typically 25/50% of its investment. Also
incurred costs are reducing the investment.
In the case of a synthetic sale, GPs usually do not give much representation (Reps) or
warranties to the buyer because they want to get rid of sold investments.
In their opinion, the IAFM proposal is not likely to become a law because of the importance
of other markets (US and emergent ones).
Legal advisers usually work about 30/50 hours on a straight sale of LP interest. For a
synthetic sale they work c.500/1000 hours.
Appendix - 170 -
7.11 Call with UBS (02 February 2010)
Call UBS 02nd February

Contact: Nicolas Lanel (UBS Private Funds Group – Head of European Secondary Market
Advisory Team), Jasmine Hunet (UBS Private Funds Group – Secondary Market Advisory)
When: 02nd February 2010, from 3:30PM to 4:30PM (UK time)
Subject: Advisers, Market insight, valuation
Content:
1. UBS PFG profile
UBS PFG is the advisory group in charge of raising private equity funds from
institutional investors worldwide and is advising on the secondary sale or restructuring of
portfolios of direct or fund investments.
The secondary advisory team is composed of 22 professionals across London and New York.
It was founded 6 years ago in New York by Nigel Dawn.
The Secondary advisory team focuses primarily on large or structured transactions and has
pioneered a number of innovative solutions to maximise value or achieve sellers objectives.
The team competes primarily with Campbell Lutyens in Europe and Cogent Partners in the
US.
2. Market insight
Dry powder:
According to UBS estimates $45bn of dry powder was available to buyers at the beginning
of 2010.
2009 transaction volumes decreased to app. $9bn from a peak in 2008 of $20bn.
Correlation between the primary and the secondary market:

It is estimated that historically, +/-3 to 5% of primary fund commitments are ‘turning
over’ in the secondary markets. This number had been rising steadily up to 2009 when
market conditions made it prohibitive to use the secondary markets as a portfolio
management tool.
UBS estimates that volumes should bounce back to in excess of $20bn, driven by the
resurgence of large portfolio deals.
Outlook for the next years:

Appendix - 171 -
As the economic outlook further improves and capital calls resume, liquidity pressure will
rise again on certain over-committed investors. This, combined with sustained regulatory
pressure on banks will drive deal flow which will be facilitated by rising valuations supported
by rising public markets and underlying NAV’s. However, as deal flow reaches record levels,
sellers’ ability to drive deal terms will be eroded by human resource limitations at buyers
who will have to carefully elect where to deploy their limited human capital.
Volcker Rule:
Mr Lanel does not think that the Volcker Rule will lead to a sudden wave of transactions
by banks given the time horizon which has been granted to them to transaction out of
restricted areas. However, regulatory pressure imposed by Basel II had already put things in
motion for banks to dispose of non-core assets in particular in PE and a number of legacy
“pay to play” programmes have already been sold down.
3. Valuation issues
Listed Investment trusts:
Listed investment trusts have provided a good proxy for the secondary markets until
recently where they have failed to ‘catch up’ with the marked reduction in discounts.
Expected returns:
During the crisis, returns targeted by buyers went up because of the lack of visibility and
the associated risk. Nowadays, it went back to ‘normalized’ levels of 15 to 20% IRR and app.
1.8x return for LP portfolios and app. 25% and in excess of 2x for ‘secondary directs’.
Appendix - 172 -
7.12 Call with HarbourVest Partners (09 March 2010)
Call HarbourVest Partners 09th March

Contact: Mr Peter Wilson (Managing Director)
When: 09th March 2010, from 2:00PM to 2:30PM (UK time)
Subject: Market insight, Valuation.
Content:
1. HarbourVest Partners company profile

HarbourVest Partners is one of the biggest independent buy-side firm that provides
private equity solutions to its clients. Founded in 1982 as an investment division of John
Ancock insurance company, the firm spun out and became independent in 1997. Up to date
it manages $32bn in primary, secondary and direct investments. Its secondary program is
currently investing its seventh fund: Dover Street VII, a vehicle of $2.9bn dedicated to
secondary investments. Their secondary investments include LP interests, direct investments
but also hybrid structures. HarbourVest who already invested $7bn in the secondary market
has a dedicated secondary team of 24 professionals.
2. Market insight
2009 secondary transaction volume: $6-8bn was transacted in 2009 on the secondary
market which represents a 25% decline from previous year.
Correlation between the primary and the secondary market: Historically, +/-3 to 4% of
primary fund commitments are exchanged in the secondary market after an average 4 to
5 years. Considering historical data Mr Wilson also see an increase in the percentage of
exchanged commitment as per last years.
The Bid/Ask spread is tightening; current discount trend is about 20% to NAV on the
market and should remain similar this year because of the constant perceived risk in the
market.
Market imbalance: The secondary market is still a buyer market. The dry powder should
be around $20bn in dedicated secondary capital and c. $35-40bn is potentially available
on an opportunistic basis. This total $55-60bn of dry powder which will be invested on
average in the next 4 years should be compared with a potential transaction volume of
about $100bn in the next 4 years which clearly evidences an imbalance on the market
The Volcker Rule: Mr Wilson does not think this project will be translated in a similar law.
It should not urge banks to sell their PE division/assets. However, the trend clearly
Appendix - 173 -
indicates that regulated financial institutions have to watch carefully if they want to keep
those assets because of its cost of capital and regulatory concerns (Basel II).
3. Valuation issues
underlying assets. They never use a market valuation method (applying the existing discount
of asset class and vintage year to the fund’s NAV).
Listed Investment trusts: Listed investment trusts do not reflect an accurate trend of the
secondary market. Indeed, the market value of these assets is distorted by market effects
and used leverage.
Expected returns: Returns depend on the type of assets (LP portfolio/Direct deal).
However as a general rule, they are looking to generate mid twentieth IRR and c. 2x
multiple.
Appendix - 174 -
7.13 Call with Campbell Lutyens (10 March 2010)
Call Campbell Lutyens 10th March

Contact: Mr Julien Marencic (Vice President)
When: 10th March, from 02:00PM to 03:00PM (UK time)
Subject: Financial adviser market, Market insight.
Content:
1. Financial adviser market

Key advisers on the market are UBS PFG, Cogent and Campbell Lutyens. Distinction
between secondary advisers and brokers should be made. Several firms offer secondary
transactions brokerage services but few are able to advise and handle large, structured or
complex deals.
As the placement agent activity was dramatically reduced in late 2008/2009, many
placement agents have tried to develop a secondary advisory practice, in an attempt to
offset their declining fundraising revenues.
2. Market insight
Nowadays the average discount for a mid-quality portfolio of buyout funds is ca.
10/20% and can be closer to NAV in certain cases (best quality funds); certain funds even
trade at a premium.
Sellers: Mainly financial institutions

In 2010 most of the secondary deal flow should come from banks. Indeed, in 2009 banks
were facing much pressure because of public recapitalization, M&A, restructuring activities
or even bankruptcy. Since then, banks have been busy trying to survive in a hostile
environment by cleaning up their balance sheet and repaying the public loans they received.
Since September 2009, a number of banks have started to re-assess their PE strategy and
potential solutions could include a sale of all or part of their private equity assets. Indeed,
under Basel II RWA rules, PE assets held by banks typically attract capital requirements from
190% to 400% (depending on the regulator and on each bank’s interpretation and
application of the rules). Since this weighting is applicable to NAV+Unfunded, holding PE
assets requires a lot of capital and is therefore very expensive for regulated financial
institutions. Because of this regulation and of the volume of PE assets on their balance
sheets (for instance, banks used to invest in PE funds in order to gain access to leverage
finance deals), many financial institutions are starting to consider their PE assets as non
Appendix - 175 -
“core” and are likely to divest all or part of their holdings. Additionally, the recovery of
secondary market pricing could accelerate/reinforce this trend.
Still a buyer market… but not for a long time

The market is still a “buyer’s market”, however some signs that competition is
intensifying are being perceived in recent transactions. As of Q1-2010, CL estimates that the
dry powder available for secondary transactions is about $41-42bn (including announced
interim closes for current fundraisings). Secondary current and future fundraisings for 2010
could add ca. $27bn to this amount, should most of the secondary fundraising targets be
reached.
In terms of volume of transactions, we estimate that there will be ca. $20bn of transactions
per year over the next 3 years, which is consistent with the current dry powder available for
secondaries (up to $60bn, if secondary fundraisings are on target) and a historical average
deployment period of 3 years.
Appendix - 176 -
7.14 Meeting with Arcano Capital (18 March 2010)
Meeting Arcano Capital

18th March
Contact: Vanessa Campion (Analyst); Steve Sceery (Vice President); Ricardo Miró Quesada
(Associate)
When: 18th March, from 06:00PM to 07:15PM
Subject: Fund of fund activity and approach on the secondary market.
Content:
1. Arcano company profile
The Arcano group, founded in 2003 is an independent company with three divisions:
I) Corporate Finance Advisory, (II) Alternative Investment Management, (III) Multi-family
Office Advisory.
Arcano Capital is a Private Equity fund of funds manager. They currently have assets under
management of approx. € 800 m. invested globally. Its funds have a capacity to invest up to
20% of the committed capital in secondary transactions.
2. Approach on secondary assets:

Arcano Capital invests on an opportunistic basis in secondary assets. They prefer to
invest in funds where they have already invested in on the primary market. They usually
invest in early secondary looking for at least 25% IRR.
To this date they have closed one secondary transaction in November 2009 buying an LP
stake in a fund where they already have a primary commitment. The secondary market is for
them a way to re-balance their portfolios, take advantage of market inefficiencies, gain more
exposure to managers they like and to enter funds where they previously did not invest in
the past.
Main sources of secondary opportunities are portfolio GPs and family offices. Advisers are
also an important source of opportunities.
3. Market insight
NAV levels:
Last quarter the general trend of NAV surge 15% mainly due to the increase in EBITDA
and valuation multiples of portfolio companies.
Appendix - 177 -
Primary fundraising
Primary fundraising in 2009 did not meet expectations. 2010 is expected to improve
although it is also expected to be a difficult year in terms of fundraising.
Valuing the dry powder of opportunistic buyers in the secondary market
Opportunistic buyers such as mainly primary fund of funds represent a big part of the
secondary market volume. However this part of the secondary volume is difficult to value
because of the size of deal and of their opportunistic condition.
By applying a discount to the traditional allocation of fund of funds (c. 20%) to the secondary
market on the total dry powder of mainly primary fund of funds, we could get a good proxy
to the money they can dedicate to this market.
Appendix - 178 -
8. Analysis of published historical data

As the volumes in the market are very difficult to value precisely, I analyzed the data published by different participants,
compared it and used the most reliable. In the following analysis the data used for this study is in the grey cells.
8.1 Historical transaction volume in the secondary market

In $bn
Source 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Inside the growing market for VC 0.6
Dow Jones Guide to sec Market
Permal capital Mangement
UBS (presentations)
Carta Diem (Lexington Estimates) 0.2 0.4 0.4 0.8 0.5 1 0.5 0.6 1.4 2.2 2.8
PE Magazine (PE Analyst)
PEI Manager (Cogent/Capital Dynamics)
Triago 2.2 2.8
Dow Jones Guide to sec Market Buyers 0.579 0.71 1.494 2.35 3.09
Capital Dynamics
Green Park Cap
Campbell Lutyens (Mail Mr Marencic)
Lexington Partners (Distressed debt report)
HarbourVest Partners (Mr Wilson call)
Cogent Partners (Cogent and VentureXpert) 0.5 0.6 1.4 2.2 2.8
Selected data 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
0.2 0.4 0.4 0.8 0.5 1 0.579 0.71 1.494 2.35 3.09
Appendix - 179 -
In $bn
Source 2001 2002 2003 2004 2005 2006 2007 2008 2009
Inside the growing market for VC 8
Dow Jones Guide to sec Market 10/15
Permal capital Mangement 6.5 7 6.5 8 11 14
UBS (presentations) 8 12 15 20 9.1
Carta Diem (Lexington Estimates) 2.1 1.9 5 6.9
PE Magazine (PE Analyst) 5 7 6.7 10 18
PEI Manager (Cogent/Capital Dynamics) 6.5 7 6.5 12 13.5 20
Triago 2.1 2.8 7 7.7 7.5 10 13 14.5
Dow Jones Guide to sec Market Buyers 2.278 2.092 6.904 8.38 7.468 10.268 13.35 16.116
Capital Dynamics 4 5.1 11 17 18 17
Green Park Cap 1.9 15
Campbell Lutyens (Mail Mr Marencic) 6
Lexington Partners (Distressed debt report) 8.8
HarbourVest Partners (Mr Wilson call) 6/8
Cogent Partners (Cogent and VentureXpert) 2.1 1.9 5 7 6.7 10 18 30 6/7
Selected data 2001 2002 2003 2004 2005 2006 2007 2008 2009
2.278 2.092 6.904 8.38 7.468 10.268 13.35 16.116 9.1
Appendix - 180 -
8.2 Secondary fundraising

Source (in $bn) 1995 1996 1997 1998 1999 2000 2001 2002
Probitas Partner 0.8 0.8 0.4 2.6 2.2 2.1 4.5 4.1
UBS
PE Magazine (PE Analyst)
Dow Jones Guide to sec Market Buyers 1.068 0.653 2.741 2.021 2.445 6.405 3.961
Green Park Cap
JP Morgan AM (Thomson Reuters; VentureXpert) 2.9 5.3 3.6
Preqin (Private Equity spotlight January 2010)
Selected data 1996 1997 1998 1999 2000 2001 2002

Dow Jones Guide to sec Market Buyers (1996-2008)/Preqin (2009) 1.068 0.653 2.741 2.021 2.445 6.405 3.961
Source (in $bn) 2003 2004 2005 2006 2007 2008 2009
Probitas Partner 3.5 8.4 5.6 6.1 15.1 7.4
UBS 7.7 8.6 9.1 20.2 26.7 30.2
PE Magazine (PE Analyst) 3.1 9 6.3 10.7 16.2
Dow Jones Guide to sec Market Buyers 7.425 7.812 7.245 12.955 12.316 8.893
Green Park Cap 20
JP Morgan AM (Thomson Reuters; VentureXpert) 6 5.5 6.9 7 14.2 5.5
Preqin (Private Equity spotlight January 2010) 18.5
Selected data 2003 2004 2005 2006 2007 2008 2009

Dow Jones Guide to sec Market Buyers (1996-2008)/Preqin (2009) 7.425 7.812 7.245 12.955 12.316 8.893 18.5
Appendix - 181 -
8.3 Primary fundraising

In $bn
Source 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Partners Group
Permal Capital Management
Carta Diem (Fuente Private Equity Analyst) 21.1 13.9 17.4 17.8 33.3 38.6 49.5 80.5 117.2 132.7
Preqin 93 143 180
JP Morgan AM (Thomson Reuters; VentureXpert)
Selected data 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Carta Diem/Partners Group/Preqin 21.1 13.9 17.4 17.8 33.3 38.6 49.5 80.5 117.2 132.7
In $bn
Source 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Partners Group 250 140 70 80 120 255 370 455 375 200
Permal Capital Management 265 155 75 85 125 250 340 395 255
Carta Diem (Fuente Private Equity Analyst) 243 167.8 91.8 82.3 126.7
Preqin 250 190 146 135 206 344 535 644 629 246
JP Morgan AM (Thomson Reuters; VentureXpert) 333 244 175 133 183 334 449 585 636 221
Selected data 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Carta Diem/Partners Group/Preqin 250 140 70 80 120 255 370 455 375 246
Data: Thomson Reuters; AVCJ; EVCA; Asia Private Equity; NVCA; Dow Jones PE Analyst; Preqin (2009)
Appendix - 182 -
9. Secondary market projection model

I. Historical Data
$ bn 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Primary fundraising (Thomson Reuters; AVCJ; EVCA;
Asia Private Equity; NVCA; Dow Jones PE Analyst;
Preqin (2009)) 21.1 13.9 17.4 17.8 33.3 38.6 49.5 80.5 117.2 132.7 250 140 70 80 120 255 370 455 375 246
Secondary transaction volume Dow Jones Guide to

Sec. Market Buyers(1996-2008)/ UBS (2009) 0.2 0.4 0.4 0.8 0.5 1 0.579 0.71 1.494 2.35 3.09 2.278 2.092 6.904 8.38 7.468 10.268 13.35 16.116 9.1
2. Assumption - Probability of transaction distribution

Fund year 1 2 3 4 5 6 7 8 9 10 Total
Probability 0% 5% 10% 20% 30% 20% 10% 5% 0% 0% 100%
Average age of fund purchased (years) 0 0.10 0.30 0.80 1.50 1.20 0.70 0.40 0.00 0.00 5.00
3. Historical turnover
Probability 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1990 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1991 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1992 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1993 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1994 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1995 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1996 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1997 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1998 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
1999 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
2000 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
2001 0% 5% 10% 20% 30% 20% 10% 5% 0%
2002 0% 5% 10% 20% 30% 20% 10% 5%
2003 0% 5% 10% 20% 30% 20% 10%
2004 0% 5% 10% 20% 30% 20%
2005 0% 5% 10% 20% 30%
2006 0% 5% 10% 20%
2007 0% 5% 10%
2008 0% 5%
2009 0%
Appendix - 183 -
Vintage funds potentially brought to market

Primary raised 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1990 21.1 - 1.06 2.11 4.22 6.33 4.22 2.11 1.06 - - - - - - - - - - - -
1991 13.9 - - 0.70 1.39 2.78 4.17 2.78 1.39 0.70 - - - - - - - - - - -
1992 17.4 - - - 0.87 1.74 3.48 5.22 3.48 1.74 0.87 - - - - - - - - - -
1993 17.8 - - - - 0.89 1.78 3.56 5.34 3.56 1.78 0.89 - - - - - - - - -
1994 33.3 - - - - - 1.67 3.33 6.66 9.99 6.66 3.33 1.67 - - - - - - - -
1995 38.6 - - - - - - 1.93 3.86 7.72 11.58 7.72 3.86 1.93 - - - - - - -
1996 49.5 - - - - - - - 2.48 4.95 9.90 14.85 9.90 4.95 2.48 - - - - - -
1997 80.5 - - - - - - - - 4.03 8.05 16.10 24.15 16.10 8.05 4.03 - - - - -
1998 117.2 - - - - - - - - - 5.86 11.72 23.44 35.16 23.44 11.72 5.86 - - - -
1999 132.7 - - - - - - - - - - 6.64 13.27 26.54 39.81 26.54 13.27 6.64 - - -
2000 250 - - - - - - - - - - - 12.50 25.00 50.00 75.00 50.00 25.00 12.50 - -
2001 140 - - - - - - - - - - - - 7.00 14.00 28.00 42.00 28.00 14.00 7.00 -
2002 70 - - - - - - - - - - - - - 3.50 7.00 14.00 21.00 14.00 7.00 3.50
2003 80 - - - - - - - - - - - - - - 4.00 8.00 16.00 24.00 16.00 8.00
2004 120 - - - - - - - - - - - - - - - 6.00 12.00 24.00 36.00 24.00
2005 255 - - - - - - - - - - - - - - - - 12.75 25.50 51.00 76.50
2006 370 - - - - - - - - - - - - - - - - - 18.50 37.00 74.00
2007 455 - - - - - - - - - - - - - - - - - - 22.75 45.50
2008 375 - - - - - - - - - - - - - - - - - - - 18.75
2009 246 - - - - - - - - - - - - - - - - - - - -
Historical turnover rate

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total Potential - 1 3 6 12 15 19 24 33 45 61 89 117 141 156 139 121 133 177 250
Effective Secondary transactions 0.2 0.4 0.4 0.8 0.5 1 0.579 0.71 1.494 2.35 3.09 2.278 2.092 6.904 8.38 7.468 10.268 13.35 16.116 9.1
Effective Turnover rate 6.5% 3.1% 2.9% 4.6% 5.3% 5.0% 2.6% 1.8% 4.9% 5.4% 5.4% 8.5% 10.1% 9.1% 3.6%
Weighted average turnover rate from 1995-2002 3.38%
Appendix - 184 -
Projections
Assuming constant fundraising in 2010E/2011E/2012E as of 2009 246
Probability of future transaction distribution

Fund raised 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
1999 132.7 20% 10% 5% 0% 0%
2000 250 30% 20% 10% 5% 0% 0%
2001 140 20% 30% 20% 10% 5% 0% 0%
2002 70 10% 20% 30% 20% 10% 5% 0% 0%
2003 80 5% 10% 20% 30% 20% 10% 5% 0% 0%
2004 120 0% 5% 10% 20% 30% 20% 10% 5% 0% 0%
2005 255 0% 5% 10% 20% 30% 20% 10% 5% 0%
2006 370 0% 5% 10% 20% 30% 20% 10% 5%
2007 455 0% 5% 10% 20% 30% 20% 10%
2008 375 0% 5% 10% 20% 30% 20%
2009 246 0% 5% 10% 20% 30%
2010E 246 0% 5% 10% 20%
2011E 246 0% 5% 10%
2012E 246 0% 5%
2013E 246 0%
Appendix - 185 -
Commitments available to transact on the secondary market

2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
1999 26.5 13.3 6.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0
2000 75.0 50.0 25.0 12.5 0.0 0.0 0.0 0.0 0.0 0.0
2001 28.0 42.0 28.0 14.0 7.0 0.0 0.0 0.0 0.0 0.0
2002 7.0 14.0 21.0 14.0 7.0 3.5 0.0 0.0 0.0 0.0
2003 4.0 8.0 16.0 24.0 16.0 8.0 4.0 0.0 0.0 0.0
2004 0.0 6.0 12.0 24.0 36.0 24.0 12.0 6.0 0.0 0.0
2005 0.0 0.0 12.8 25.5 51.0 76.5 51.0 25.5 12.8 0.0
2006 0.0 0.0 0.0 18.5 37.0 74.0 111.0 74.0 37.0 18.5
2007 0.0 0.0 0.0 0.0 22.8 45.5 91.0 136.5 91.0 45.5
2008 0.0 0.0 0.0 0.0 0.0 18.8 37.5 75.0 112.5 75.0
2009 0.0 0.0 0.0 0.0 0.0 0.0 12.3 24.6 49.2 73.8
2010E 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.3 24.6 49.2
2011E 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.3 24.6
2012E 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.3
2013E 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
TOTAL 140.5 133.3 121.4 132.5 176.8 250.3 318.8 353.9 339.4 298.9
Projections
Years 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E
Downside case (5.6%) 5.60% 7.5 10.3 13.4 16.1 9.1 14.0 17.9 19.8 19.0 16.7
Average 17.5
Base case (6.4%) 6.41% 7.5 10.3 13.4 16.1 9.1 16.0 20.4 22.7 21.7 19.1
Average 20.0
Upside case (7.2%) 7.20% 7.5 10.3 13.4 16.1 9.1 18.0 23.0 25.5 24.4 21.5
Average 22.5
Appendix - 186 -
10. Historical valuations in the Private Equity secondary market

10.1 LBO funds
Secondary bids for LBO funds over time (in % of NAV):
120%
110%
100%
Average
90%
High
80% Average
70% Median
60% Average
50% Low
40%
30%
20%
2005 2006 2007 H108 H208 H1 09 H2 09 H1 10
Source: Author’s own based on data from Cogent Partners pricing analysis (2007-2008-2009-2010).
10.2 Venture capital funds

Secondary bids for venture capital funds over time (in % of NAV):
110%
100%
90% Average
high
80%
Average
70%
median
60%
Average low
50%
40%
30%
2005 2006 2007 H108 H208 H1 09 H2 09
Source: Author’s own based on data from Cogent Partners pricing analysis (2007-2008-2009).
Appendix - 187 -
10.3 Other funds (real estate- infrastructure- distressed)

Secondary bids for real estate, infrastructure and distressed funds over time (in % of NAV):
110%
100%
90% Average
high
80%
Average
70%
median
60%
Average
50% low
40%
30%
2005 2006 2007 H108 H208 H1 09 H2 09
Source: Author’s own based on data from Cogent Partners pricing analysis (2007-2008-2009).
Appendix - 188 -
11. Structure of listed Private Equity funds

11.1 Structure of listed direct Private Equity fund
Source: Website of LPX Group

Appendix - 189 -
11.2 Structure of listed indirect Private Equity fund (listed fund of funds)
Source: Website of LPX Group

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PE1

Private Equity Secondary Market

Arnaud van Tichelen

the marketplace for alternative investments

Trevor S. Giles CMA CFA

for the canadian market

va ncou ver , br itish c olu mb ia , c ana da 1 .8 77 .3 54 .4 422

w w w .ca r aca l la .ca

Keywords: Private Equity, secondary market, secondaries, liquidity, valuation, selling

CONTRIBUTORS OF THE STUDY................................................................................................. II

ABSTRACT ................................................................................................................................... III

TABLE OF FIGURES ......................................................................................................................... IX

LIST OF TABLES ............................................................................................................................... XI

ABBREVIATIONS AND SYMBOLS..............................................................................................XII

II. CHARACTERISTICS OF THE PRIVATE EQUITY SECONDARY

1. DESCRIPTION OF THE MARKET ........................................................................ 18

1.5.1 The beginning of the market (1982-2002).......................... 41

2.1. Different types of transactions ..................................................................... 46

3.2.1 The contingent conditions ......................................................... 60

III. VALUATION IN THE PRIVATE EQUITY SECONDARY MARKET 76

1. HISTORICAL MARKET VALUATIONS ................................................................. 76

1.1.4 The valuation depends on the vintage year of the fund . 80

3.3.4 The lag of the NAV ....................................................................... 109

IV. CONCLUSIONS ........................................................................................114

1. CONCLUSIONS .................................................................................................. 114

1. BOOKS .............................................................................................................. 123

ABBREVIATIONS AND SYMBOLS

FREE TO LIST ASSETS

Get connected at: www.SecondMarket.com @SecondMarket SecondMarket

Structure of the study

Figure 1: Structure of the study

Source: Author’s own

CHARACTERISTICS OF THE PRIVATE

II. CHARACTERISTICS OF THE PRIVATE EQUITY SECONDARY MARKET

1. Description of the market

1.1. Theoretical framework

1.1.1 Private Equity basics2

1.1.2 An illiquid investment

1.2. Volumes of investment in Private Equity

1.2.1 The size of the primary market

Figure 3: Raised capital in the primary market ($ billions)

1.2.2 The size of the secondary market

i. Transaction volume in the secondary market

Figure 4: Transaction volume in the secondary market ($ billions)

Figure 5:: Geographical distribution of the transactions

ii. Volume raised by dedicated secondary funds

Figure 6: Volume raised by secondary Private Equity funds ($ billions)

1.3. Different reasons to resort to the market

1.3.1 Reasons that motivate the sellers

Figure 7: Reasons that motivate the sellers in the market (2007/2008/2009)

Source: Author’s own using data from

"Lock in" returns

Re-direct resources to other asset

0% 20% 40% 60% 80% 100%

Winter 2009-10 Summer 2007

1.3.2 Reasons that motivate the buyers

Source: Preqin; «2009 secondary review»; 2009.

Figure 10: The “J-Curve”

Source: JP Morgan Asset Management; «Secondary Private Equity Discussions»; 2009.

22% Not a core part of the

1.4. The secondary market participants

1.4.1 The advisers

i. The financial advisers27