Secondary Private Equity Markets No Longer Appear “Secondary!”

As I continue to hunt for my next major article, I thought I’ll focus on a general topic this time. And the subject that I have chosen to write about is an emerging private equity strategy that’s slowly but steadily gaining popularity.

Secondaries or Secondary private equity investments, in very simple terms, can be described as one private equity firm selling a company to another private equity firm. Another interpretation of this term, according to an article in Wall Street Journal, is a strategy through which investors such as pension funds and endowments sell off their investments in private-equity funds before the pools have sold off all their assets.

The secondary private equity market has been growing steadily, and even though it is in the maturing phase, stats have shown that the market is gaining popularity. Moreover, 2014 was indeed a remarkable year   for secondaries. According to a report by Preqin, $13 billion was raised in capital commitments by the end of June 2014. Figure 1 shows the comparison of annual secondaries fundraising since 2006.

According to an article in Wall Street Journal, secondary advisory firm Cogent Partners predicted that the secondary market could witness above $30 billion worth of transactions by the end of 2014, that is, almost twice the transaction value of 2013 ($15 billion).

Figure 1. (Source: Preqin Special Report June 2014)

 An overvalued stock market, a record amount of un-invested capital ($1.1 trillion) committed to private equity funds, and gaining popularity could imply that 2015 would be no different for this young maturing market. Expect more investors to flock to the secondary market this year resulting in greater aggregate capital raised.

Cybersecurity: The Next Meal for “Activ”ist Hedge Funds

It has been nearly a fortnight since the Sony Hack saga, but it is an event that is likely to haunt the business world for weeks, if not months. The entire episode underlies the importance of stringent cyber-security measures in today’s business world. According to a recent article in Wall Street Journal, the US Government and companies are involved in desperate attempts to find a solution to fortify their cyber defenses to prevent similar attacks in the future.

However, in addition to governments, there is one entity, which can ensure that cyber-security is at the forefront of company agendas. And that entity, which also happens to be my favorite superhero of the corporate world, is none other than the typical activist hedge fund!

2014 was the year of hedge fund activism. The growth has been so rapid that some have gone as far as saying that the world is witnessing activism on steroids. These activists are known to use a variety of tactics to force companies to undergo changes, which result in improved performance and stronger bank balances for the target companies’ shareholders.

In one of my earlier articles in my blog, I have mentioned how forcing the target company to be acquired has been the most successful and profitable hedge fund activist outcome. However, last year, we also witnessed a number of company splits as a result of hedge fund activism. Acquisitions and Spin-offs continue to be the popular activist outcomes even today.

However, in my opinion, 2015 should be the year where hedge fund activists shift their focus to strengthening the cyber defenses of their targets. The Sony incident was an eye opener to the corporations worldwide. However, corporations are known to be forgetful and it is precisely why the focus of hedge fund activists needs to be in the area of cyber-security. Activist investors like Carl Icahn and David Einhorn are capable of being quite forceful when required and are known to bring about positive changes in companies, which they target.

In today’s world where hackers have become increasingly sophisticated and where there are entities that are willing to use the cyberspace to inflict maximum destruction to their adversaries, it is extremely crucial that companies fortify their cyber defenses. And hedge fund activists are the perfect catalysts to speed up the process.