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For the last decade, secondary market activity involving all types of private equity investments has been a booming and increasingly efficient aspect of the far larger overall private equity market. Total secondary private equity transactions have grown 14-fold over the last ten years, from approximately $600 million in 1998 to well over $8 billion in 2007. Indeed, secondary private equity investing grew at an even faster rate than the unprecedented and explosive growth of total private equity assets under management during the same time period.

This megatrend of growing secondary investment was originally fueled by the business of trading limited partnership or limited liability company interests (which we will refer to in this article as Fund Interests), in the largest and best-known private equity funds. But as the market has grown and developed, secondary investing has expanded its scope significantly and become more global. Today there are active markets for Fund Interests of almost any size and in almost any private equity investment sector—large-scale corporate private equity funds, hedge funds, real estate funds, geography-specific funds, distressed securities funds, venture capital funds, etc. The leading secondary funds in 2008—such as Lexington Partners, Coller Capital, HarbourVest Partners, and Landmark Partners—with billions of dollars dedicated to secondary investing, are now bigger than the leading primary private equity funds of the 1990s. A recent report from Probitas Partners indicates that over $15 billion was raised in 2007 alone for funds specialized in secondary investing.


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Capital Call Lines of Credit / Capital Call Bridge Facilities
Once again, our Listserve has been very active over the last few months - with vigorous discussions taking place on a number of topics. These have included offshore jurisdictions, Patriot Act issues in M&A and capital call lines of credit, which is the topic of this summary.

I began the discussion on January 4, 2008 with the following query:

"I would appreciate any input from the committee on common terms and structure for lending facilities extended to VC and PE funds in order to bridge some or all of their funding obligations at the closing of an investment or acquisition and pending receipt of capital calls from LPs.

In particular, what security are lenders obtaining?

Would the security extend to liens on the fund's right to make capital calls from LPs? If so, are lenders obtaining any acknowledgement from LPs regarding enforceability of the capital call right?

Would the security include a pledge of the applicable portfolio company's securities acquired by the fund or any other securities in the fund's portfolio?"

In all, I received 16 written responses and a number of direct telephone calls from Committee members offering information. An impressive response and a good example of the working spirit of our Committee. The written responses are summarized below (the telephone responses were consistent with these).


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A comprehensive overview of Venture Capital industry data and trends for the United States and Europe, organized by industry, by rounds, and by regions and including valuation, liquidity, M&A and IPO statistics and trends.


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A summary review of deal terms, including financing rounds, price change, magnitude of price change (or barometer), liquidation preference, multiple liquidation preferences, participation in liquidation, cumulative dividends, antidilution provisions, pay to play provisions, redemption, and corporate reorganization. For companies headquartered in the San Francisco Bay Area.


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In 1953, eight years before its independence from the United Kingdom, Kuwait established the Kuwait Investment Board to invest its surplus oil revenue. That was perhaps the first-ever "sovereign wealth fund" (SWF), although the term would not exist for another 50 years. SWFs are large pools of capital controlled by a government and invested in private markets abroad. Today, they are growing rapidly in both number and size. Twelve SWFs been established since 2005, and altogether SWFs control roughly $2.5 trillion -- a figure now growing, according to some estimates, by $1 trillion a year.

These developments should not cause alarm, but they do raise legitimate policy questions. Governments should consider the implications of SWFs' growing importance with calm and precision. Many concerns, aired frequently in policy debates and prominently in the media, have been exaggerated, in part because of a lack of understanding of SWFs and other vehicles for sovereign investment. A fuller picture of SWFs' history, purpose, size, growth, and broader systemic implications is needed. Such an understanding, along with a set of clear policy principles for both SWFs and the countries in which they invest, will help preserve openness to foreign investment and promote financial stability worldwide.


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Flush with dollar-denominated cash from booming commodities prices and trade surpluses versus the United States, sovereign wealth funds (SWFs) - the investment arms of resource-rich or export-heavy countries - have emerged as an important and growing force in the U.S. equity investment and M&A markets in recent months. There have been more than ten major SWF transactions in the U.S. since July, with the announcements of Abu Dhabi Investment Authority's $7.5 billion equity investment in Citigroup, China Investment Corporation's approximately $5 billion equity investment in Morgan Stanley and the $5 billion equity investment in Merrill Lynch by Temasek Holdings of Singapore being among the most notable. The recent SWF activity takes place in the shadow of the political failure of last year's Dubai Ports World affair, and the financial press has been quick to conclude that SWFs and other foreign investors have, of political necessity, settled on a common blueprint for U.S. investment: buy small stakes, do not seek board rights or control, and avoid certain sensitive sectors.

But, in fact, the recent transactions exhibit significant variation and financial sophistication, ranging from structured minority-no-governance equity infusions (Citigroup, Merrill Lynch, Morgan Stanley, Advanced Micro Devices) to pre-IPO investments (Blackstone, Och-Ziff) to strategic joint venture investments (Bear Stearns, MGM Mirage) to full acquisitions (Barneys). We view the recent activity not as having reached a settled plateau, but as early-stage experimentation by SWFs testing the boundaries of economically and politically feasible transaction structures. These transactions should pave the way for more frequent and larger investments in the coming years as overseas accumulations of commodities profits and foreign exchange reserves are deployed in search of higher returns.


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