Evolution and Recent Trends Emmanuel Roubinowitz, Ponte Partners - - PowerPoint PPT Presentation

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Secondary Market: Evolution and Recent Trends

Emmanuel Roubinowitz, Ponte Partners Internet Securities Event March 16, 2016

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Secondary Overview

• Acquisition of shares in PE/VC funds or

PE/VC backed companies

• Average fund life is 14.2 years so some

investors will need to sell

• 5 to 10% of the primary market
• $35 billion market in 2015
• Started in the 90’s
• Originally distressed sellers, now many

different types of sellers

• These trends should continue

Source: Preqin, J-Curve is a hypothetical representation of fund cash flows

Cash flows Years Early Mid Tail end

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Secondary Segments

LP Interests Transaction Type: Acquisition of LP interests in funds Sellers: Endowments, family offices, foundations, insurance companies, public pension funds etc. Portfolio Directs Transaction Type: Acquisition of securities in a group of companies Sellers: Corporates, funds (end of life) etc. Company Directs Transaction Type: Acquisition of securities in one company Sellers: employees, angel investors

LPs PE/VC Fund Portfolio Company 1 Portfolio Company 2… Portfolio Company N Portfolio Company 2

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Rationale Examples Estate management An estate sells an interest in a fund in the context of a succession Change of strategy The new CEO of a corporation decides to liquidate a portfolio

• f interests in smaller companies

Liquidity An employee of a technology company sells some of her/his shares to buy a house Reduction of PE investment A public pension fund needs to reduce the amount invested in PE following decrease of other assets (denominator effect) Portfolio management An endowment reduces the number of its GPs from 200 to 150 to cut monitoring costs Regulations Following Basel III, a European bank has the obligation to sell all PE assets

Sellers’ objectives

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Secondary Growth

$6.7 $7.0 $6.7 $7.9 $11.4 $13.7 $8.6 $18.2 $23.2 $24.8 $16.7 $30.0 $0.4 $1.4 $0.7 $2.4 $1.9 $2.7 $0.6 $2.7 $1.6 $1.1 $6.6 $5.2 $- $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Transaction Volume (In Billions)

Secondary Market Transaction Volumes 2003 - 2014

LP Direct

$7.0 $35.1

• Growth of underlying PE market
• Secondary as a % of primary increased too, from ~2% in the

early days to 90’s to 6% today

• Sellers are comfortable with the process

Source: Dow Jones Private Equty

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Secondary Performance

• Lower variance across managers
• Downside protection
• Higher IRR

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Secondary pricing

Factors influencing pricing

Asset based

• Perceived GP quality
• Asset risks
• Maturity
• Valuation style

Market based

• Market sentiment
• Supply and demand

109% ¡ 73% ¡ 59% ¡ 89% ¡ 86% ¡ 84% ¡ 91% ¡ 96% ¡ 95% ¡ 2007 ¡ 2008 ¡ 2009 ¡ 2010 ¡ 2011 ¡ 2012 ¡ 2013 ¡ 2014 ¡ 2015 ¡(H1) ¡

Buyout pricing as % of NAV

103% ¡ 63% ¡ 68% ¡ 70% ¡ 74% ¡ 73% ¡ 79% ¡ 81% ¡ 82% ¡ 2007 ¡ 2008 ¡ 2009 ¡ 2010 ¡ 2011 ¡ 2012 ¡ 2013 ¡ 2014 ¡ 2015 ¡(H1) ¡

VC pricing as % of NAV

Source: Cogent Greenhill

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How to calculate a secondary price

Analyze companies Prepare forecasts Set target multiple (risk) Calculate Price Negotiate

Example

• LP selling an interest in a fund with a value of

$5m (4 companies)

• Buyer expects them to be sold for $7m over 3

years Ø For a target secondary multiple 1.6x, buyer will offer a price price of $4.38m, i.e. discount 12.5%. Ø If projections of $8m, no discount Price + Past Distributions Amount Invested Seller’s Outcome =

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Technology secondaries: recent trends

Private investment in technology companies has reached the size of public market

• Private investment in VC/PE amount is more than

$1 trillion

• Total valuation of Unicorns amounts to $525bn

(NASDAQ market cap $7.5 trillion) Original investor base (institutions) is now including more and more individuals

• High net worth individuals
• Employees
• Angels

But investors’ liquidity options remain limited

Endowments Corporates Employees, Individuals 20 years

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Technology: growing inventory of companies

Source: NVCA

• Number of exits ~10% of total

companies

• The rest disappears or remains

in “inventory”, waiting for liquidity events

Number of VC Backed Companies

• vs. Exits

8042 4595 3217 3036 3236 3300 3890 4230 4199 3173 3667 4039 3964 4238 4361 617 422 388 350 483 504 549 578 423 364 392 543 526 466 574

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of VC backed deals Exits (M&A - IPO)

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Conclusion: what to expect?

• Volume of secondary sales will continue to grow
• Institutional investors are starting to sell:

Intel Corp., one of the world’s largest makers of computer components, is planning to sell part of its venture capital unit, assets that could be worth as much as $1 billion, said people familiar with the matter. Bloomberg, March 11 2016

• Large amount of sales from individual investors
• Interesting buying opportunities
• Regulations may appear

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The information contained in this document is provided for general information and discussion purpose only. It has not been prepared for any other purpose and is not contractual. This document is not intended to make any offer, inducement, invitation or commitment to subscribe to Ponte.

Emmanuel Roubinowitz emmanuel@pontepartners.com Ghia Griarte ghia@pontepartners.com