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| Feature |
Risk & Reward Retrospective
John Ferry
01/01/2006
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9. The Secondary Private Equity Market
The Backdoor Investor January 2005, page 86.
Interest in the secondary market for private equity, which lets investors sell
unwanted assets and buyers pick up private equity exposures at a discount,
continues to increase on the back of unabated demand for alternative asset
allocations, says Lawrence Penn, managing director at the Camelot Group
International, a New York–based advisory firm that manages and facilitates
secondary market transactions. “Our deal flow has never been at a higher level,”
he maintains. “I’ve just talked to around 13 different investors in Dubai, and
they are all interested in this.”
 Firms that specialize in these transactions
work with both buyers and sellers to tailor a range of transaction types, from
simple buy-sell agreements to more sophisticated collateralized loans and
swaps.
Penn says Camelot believes a number of factors are driving the
secondary market’s continued growth. For example, limited partners in private
equity funds are seeing a slowdown in distributions, forcing them to source
liquidity in the secondary market. Camelot says the volume of deals offered by
wealthy individuals and families looking for liquidity has risen sharply.
THEN AND NOW
The secondary market for private equity interests blossomed in the
wake of the sector’s crash in 2001–2002, as families struggling to make capital
calls or those who simply needed more liquidity used it to bail out. But despite
the private equity boomlet of 2004–2005, the secondary market continues to grow,
as investors take advantage of it to restructure and rebalance their portfolios. |
For now the future of the secondary private equity market looks rosy, and
Penn sees no limit to its eventual growth. “There is a constant need for people
to restructure their investments, so the market continues to grow on a global
basis,” he says.10. Economic Derivatives
Macro Machinations August 2005, page 92.
The market for economic derivatives, which let investors hedge or
take market risk directly associated with the release of key economic
indicators, such as the nonfarm payroll number or GDP, is developing quickly.
Last year, the main markets for the products, which are run by Goldman Sachs and
Deutsche Bank in affiliation with broker Icap, were limited to professional
traders. However, at the end of June, Goldman announced a partnership agreement
with the Chicago Mercantile Exchange (CME) to broaden access to economic
derivatives beginning this year.
The CME agreed to provide electronic order
routing to Goldman’s auction market starting in the first quarter. “This new
partnership is expected to significantly broaden access to the economic
derivatives market and increase the level of investor participation,” CME
officials said in a press release following the agreement.
THEN AND NOW
Only six months ago, the most powerful tools for hedging against
adverse changes in macroeconomic variables like unemployment or GDP growth were
the exclusive province of the professional investor community. Since then, their
purveyors have worked to broaden access to these instruments. |
Economic
derivatives could be used by entrepreneurs as a hedging tool against a loss of
business due to an economic downturn, or by investors as a hedge against a spike
in inflation. Bets can currently be taken on GDP, U.S nonfarm payrolls, the
Institute of Supply Management’s PMI index, weekly initial jobless claims,
retail sales, European inflation, U.S. inflation and the international trade
balance.
Meanwhile, an economic hedging market of a different stripe has now
emerged. HedgeStreet, a San Mateo, Calif.-based company, is offering economic
hedging tools online to retail investors. HedgeStreet sells special contracts
called hedgelets, which allow investors to speculate on whether or not a
particular economic statistic will come in at a given level. Last year the
company launched contracts on real estate price movements and the cost of
gasoline. HedgeStreet says those contracts are rapidly gaining popularity. On
the back of oil price volatility, energy contracts represented 42 percent of the
company’s trading volume in July.John Ferry is a senior correspondent for Worth.
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