1. PE1
Private Equity Secondary Market
PE2 Valuation Analysis
Arnaud van Tichelen
C ARACALLA SCALNAR S
P A R T E R
ICADE, Faculty Advisor: Rocío Sáenz-Díez
London, September 2010
TM
the marketplace for alternative investments

2. © 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.

3. ‐ 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.

4. 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
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5.
We leverage our network and expertise to help limited
partners achieve their private equity allocation
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sourcing, screening, due diligence, monitoring and I
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Feel free to contact us:
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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

6. -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.

7. -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

8. -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

9. -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

10. -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

11. -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

12. -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

13. - 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

14. - 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

15. - 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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17. “You may like our performance, you may not like our performance, but you’re my
partner for the next twelve years.”
David Bonderman (TPG founder)

18. PART I:
INTRODUCTION

19. 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

20. 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

21. PART II:
CHARACTERISTICS OF THE PRIVATE
EQUITY SECONDARY MARKET

22. 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)

23. II. Characteristics of the Private Equity secondary market - 19 -
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

24. II. Characteristics of the Private Equity secondary market - 20 -
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

25. II. Characteristics of the Private Equity secondary market - 21 -
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

26. II. Characteristics of the Private Equity secondary market
cs - 22 -
In 2008, transaction volume in the secondary market was over $16 billion. Despite the
magnitude of this amount, this large volume represents less than 1% of the total size of the
volume
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 direct relationship between the primary and secondary markets
sitive
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 to the Private Equity secondary market have
dedicated
raised commitments totalling $75 billion.
12
Secondary transactions in 2008 (Dow Jon Guide)/Assets managed by Private Equity in 2008 (Preqin)= $16
Jones te $161
billion/ $25 trillion = 0.64%

27. II. Characteristics of the Private Equity secondary market - 23 -
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

28. II. Characteristics of the Private Equity secondary market - 24 -
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)

29. 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.

30. II. Characteristics of the Private Equity secondary market - 26 -
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

31. II. Characteristics of the Private Equity secondary market - 27 -
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

32. II. Characteristics of the Private Equity secondary market - 28 -
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

33. II. Characteristics of the Private Equity secondary market
cs - 29 -
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
Short-term 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
generally positive. A study carrie out by Preqin26 showed that whereas nearly 63% of GPs
. 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 market are advisers, sellers and buyers.
ndary
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, the buyer must employ the services of a legal adviser to analyse
rmore,
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 advisers (see list in
ancial
appendix 1.1), there were nearly 50 financial advisers serving the market. According to
25
Fidequity; «Global Private Equity Limited Partner Survey
Global Survey-Q3 2009»; Q3 2009
26
Preqin; «Private Equity Secondary Market: Short
Private Short-term boom, long-term growth»; 2009
;
27
See appendix 7.13, which includes a summary of the call to Campbell Lutyens (10 March 2010)

34. II. Characteristics of the Private Equity secondary market - 30 -
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

35. II. Characteristics of the Private Equity secondary market - 31 -
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
Source: Author’s own
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

36. II. Characteristics of the Private Equity secondary market - 32 -
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.
Table 2: Legal advisers on the secondary market33
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
Source: Author’s own
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.

37. II. Characteristics of the Private Equity secondary market - 33 -
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

38. II. Characteristics of the Private Equity secondary market - 34 -
• 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
See appendix 7.4, which summarises the email from Preqin (2 December 2009)

39. II. Characteristics of the Private Equity secondary market - 35 -
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
See appendix 7.4, which summarises the email from Preqin (2 December 2009)
42
Preqin; «Survey by Endowments investing in Private Equity»; October 2009
43
Preqin; «2009 Global Private Equity Review»; 2009
44
Probitas Partners ; «Private Equity Market Review and Institutional Investor Survey»; 2009

40. II. Characteristics of the Private Equity secondary market
cs - 36 -
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 vehicles designed to invest in other funds. In order to
nvestment
diversify their portfolio and accelerate returns, these funds usually invest a p
accelerate portion of
their capital in the secondary market. The amount these funds can allocate to secondary
se
assets (defined in their LPA) has greatly increased over time and is usually about 20%46.
• Dedicated secondary funds Analysis of buyers in the market, the list of which is in
funds: nalysis
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
dedicated to the secondary market47. According to a study by Preqin, the majority of the
dary
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 Pricing analysis Summer 2009 2009
Secondary 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
Preqin; «The 2009 Preqin Private Equity Secondaries Review»; 2009

41. II. Characteristics of the Private Equity secondary market - 37 -
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
Source: Author’s own
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

42. II. Characteristics of the Private Equity secondary market - 38 -
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
Dow Jones; «Guide to secondary market intermediaries»; 2009
51
See appendix 7.2, which summarizes the call to Secondmarket (1 December 2009)

43. II. Characteristics of the Private Equity secondary market - 39 -
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)

44. II. Characteristics of the Private Equity secondary market - 40 -
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)

45. II. Characteristics of the Private Equity secondary market - 41 -
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)

46. II. Characteristics of the Private Equity secondary market - 42 -
Figure 16: The beginning of the market (1982-2002)
Source: Author’s own
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

47. II. Characteristics of the Private Equity secondary market - 43 -
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