Private equity is an illiquid asset class, with funds usually structured as ten year partnerships (and possible extensions in addition to that). For investors who need to scale down their exposure or provide liquidity from their private equity investments a secondary sale to a buyer of private equity LP shares represents a solution. Investors may elect to carve out a proportion of their fund shares across their portfolio, or divest selected individual funds. The market for transactions is unregulated and each transaction is negotiated either directly between the buyer and the seller, or via a third party intermediary. Such transactions have been common in e.g. the United States for 20 years but global volumes really started picking up after year 2000, and have grown significantly since then.

Emerging Nordic secondary market

The secondary market for private equity funds in the Nordic region has historically been rather insignificant, as most investors have been building their portfolios in a fairly immature Nordic market in the period up to 2008. Following a prolonged period of reduced proceeds from Nordic funds after the peak in 2006-2007 as well as the liquidity constraints brought on by the financial crisis in 2008-2009, secondary transaction volumes in Nordic private equity funds increased significantly in 2009-2010.

Motivations for actively managing a private equity portfolio may vary and include:

·         Risk management: Releasing disproportional investment capacity through realization of PE assets.

·         Portfolio management: Shifting exposure from private equity to other asset classes.

·         Realization of tail-end funds: Selling mature funds to lock in profits or show early proceeds. Deal with funds reaching end of lifetime. Realize proceeds to increase future commitment capacity.

·         Regulatory requirements: Maintain buffer towards maximum allowed PE-allocation or allocation to alternative assets. Pre-empting expected changes to regulatory framework.

·         “Cleanup” exercise: De-selection of funds, concentration of managers, downscaling certain segments within PE.

·         Internal re-balancing: Need for third party price verification.

·         Opportunistic: Realization of specific funds based on commercial considerations.

Although volumes are cyclical we expect to see continued secondary activity in the Nordic market as more investors are made aware of the benefits provided by a more liquid marketplace for shares in private equity funds. Fund managers are also gradually becoming more adapted to the new situation and most no longer view transactions in own funds as something negative but rather an attractive proposition for investors who would like the flexibility to liquefy its positions in the funds.