WSJ Pro Private Equity - Laura Kreutzer and Sabrina Willmer - April 15, 2010
Lexington Partners has attracted more than $4 billion in capital for its seventh secondary fund and has seen a noticeable uptick in secondary transactions hitting the market since the beginning of 2010, according to a March investor letter obtained by LBO Wire.
The $4 billion-plus that Lexington has rounded up so far for Lexington Partners Fund VII LP includes hard-circled commitments and a separate-account mandate received from the China Investment Corp., which is to be invested alongside the co-mingled fund, said two people familiar with the fund-raising.
Lexington has extended fund-raising for Fund VII, which has a $5 billion target, until the end of this year, according to the investor letter.
The firm collected $3.8 billion for Fund VII’s predecessor, which wrapped up in 2006 ahead of a $2.5 billion target.
Although many secondary buyers, including Lexington, say that transaction volume fell short of expectations in 2009, the letter points to a different scenario shaping up in 2010, as the underlying private equity portfolios have stabilized.
“With the benefit of observing up to six months of additional activity at underlying portfolio companies in which stabilization and improvement in the operational performance can be seen, secondary market discounts to [September 2009 valuations] have now narrowed and are therefore optically more appealing to sellers,” the letter states. “As a result, there has been a noticeable increase in significant deals coming to market in early 2010 with clearly defined mandates to sell.”
In other words, what may seem to be a narrow discount to September 2009 valuations is actually a wider discount when secondary buyers factor underlying portfolio improvements of the past six months – which is helping buyers and sellers find more middle ground.
Lexington sees banks as a particularly fertile source of deals this year and cites more than $10 billion in near-term secondary deal flow from bank sellers alone, according to the letter.
“Based on discussions currently under way, we believe that we will prevail on a subset of these large, negotiated transactions in the first half of this year,” the letter states.
Although the letter doesn’t name any sellers, Citigroup Inc. and Royal Bank of Scotland Group PLC are two of a number of banks that are in the process of unloading assets on the secondary market, according to media reports. Natixis, KBC Group NV and Lloyds Banking Group PLC are also floating private equity assets.
Meanwhile, Lexington projects more than $1 billion in near term deal flow from hedge fund managers; the firm has acquired about $160 million of interests from hedge funds. Lexington estimates the 60 largest equity-based hedge funds hold about $65 billion in private equity assets, including up to $50 billion in hedge fund side pockets and multi-strategy hedge funds.
Senior executives at two secondary firms said they also see an uptick in supply from hedge funds coming to market.
“Many hedge funds that put up gates in late 2008 restructured their funds and negotiated two- or three-year periods where they can sell down their illiquid side pockets,” said a partner at one of the two firms, adding that some of those periods are set to expire this year.
Lexington also anticipates increased deal flow involving Asian private equity funds and has announced plans to open an office in Hong Kong, according to the letter. Lexington Partners Asia Ltd. will be the firm’s fifth office in addition to New York, Menlo Park, Boston and London.
Since the economic downturn of late 2008, New York-based Lexington has completed 24 secondary transactions, committing to invest $691 million to acquire 82 interests, according to the letter.
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