LPs shun re-ups as they rebalance portfolios

LPs are turning away existing relationships as they bump up against their target allocations. Almost two-thirds will sell interests on the secondaries market to focus resources on the best GPs, according to an LP survey by Coller Capital. There has been a 'growing recognition' among LPs of the importance of being with the best GPs.

Limited partners have started refusing to commit to new funds from GPs with whom they have existing relationships, as many of them are using the current turmoil to re-focus their resources on the best performing managers, a study has found.

In the last few golden years, LPs could push money out to a halfway good manager and get returns thrown back at them.

Jeremy Coller

In the last year, 80 percent of US LPs have refused to re-up with at least one of their existing managers, while in Europe and Asia Pacific the figures are 63 percent and 52 percent respectively, according to a survey by secondaries firm Coller Capital.

“In the last few golden years, LPs could push money out to a halfway good manager and get returns thrown back at them. There has been a growing recognition amongst the LP community as a whole of the importance of being in the best GPs: recently this has become more urgent,” Jeremy Coller, chief executive of Coller Capital, said.

Jeremy Coller

With two-thirds of LPs likely to be at or above their target allocation for private equity by the end of 2009, roughly 64 percent of respondents said they will look to access the secondaries market to increase liquidity. However, a similar number – 61 percent – will sell secondaries in order to refocus on better-performing GPs.

While there is much anticipation about the growth in the secondaries market resulting from current market turmoil, transaction levels have yet to take off as expected due to differing price expectations.

One secondaries buyer, Boston-headquartered Harbourvest, reviewed and priced around $40 billion-worth of secondary deals in the first three quarters of 2008 – more than 2007 in its entirety – but has closed just $800 million-worth, or 2 percent.

With many portfolio valuations still based on June 2008 figures, secondaries vendors are not yet prepared to drop to buyers' price expectations. Coller expects transaction levels to jump in the second quarter of 2009, as December audited results filter through to valuations.

“There is a strange dynamic in the secondaries marketplace; there is an awful lot of discussion going on but low deal activity due to differences in price expectation. In the spring we expect to see a significant uptick in the number of deals being closed,” said Coller.

Some real estate secondaries firms are hiring new staff in preparation of a wave of opportunities entering the market. Liquid Realty Partners hired former SL Green/Gramercy Capital executive John Graham for its acquistion team this week. Meanwhile Landmark Partners is also looking to raise the largest real estate secondaries fund ever targeting $750 million, according to people familiar with the matter.