Regurgitated Private Equity, Billions in Secondaries

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Most investors generally think that private equity firms exit most of their investments by initial public offerings or by outright resale of a whole company. There is actually another private equity exit strategy, and that is the secondaries market for pieces of prior private equity deals.

The Carlyle Group LP (CG) announced this week that its AlpInvest Partners reached $4.2 billion for its secondaries program. The AlpInvest Secondaries Fund V closed at its cap with $750 million raised. In a sense we would consider this regurgitated private equity where one private equity firm acquires stakes of existing companies from other private equity sellers. Generally these are thought of as stakes of a company which were involved in a private equity syndicate that have come for sale by one of the prior buyers, but is also very common is that some of the limited partners of a syndicate (or effectively the private equity clients) are looking to exit certain positions.

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The news that the AlpInvest Secondaries Program has reached $4.2 billion is far more than we would have assumed. Many of these deals are never really discussed because the stake sales are not exactly being filed for sale at the SEC and the books are generally not being shown to the public. This $750 million raised was listed as the hard cap and was above the initial target of $500 million, bringing in 18 new investors which included sovereign wealth funds, public pensions, corporate pensions, insurance companies, asset managers, and foundations from around the world.

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The secondaries market in private equity is rather large, but the public often never gets to hear about it. This will show you just how large it is: AlpInvest said that it has committed $9.1 billion through some 84 transactions in secondaries in the past 11 years.

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Do not take the term "regurgitated" as a bad meaning here because it is merely for simplification. This secondaries effort for private equity brings both investment and liquidity solutions to private equity investors and the partners. It is a much needed sector of private equity, particularly during parts of the business cycle when the IPO markets and M&A markets are not going very strong.

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Many other private equity firms use the secondaries markets as well. The Blackstone Group LP (BX) was shown earlier this month by PEHub to have launched a sixth fund which was targeting $3.5 billion to $4 billion. That is even after a deal earlier this year to acquire Credit Suisse's private equity efforts.

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Many more firms participate in this market as well.

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