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If people are selling their private equity investments on the secondary market, why would anyone want to buy them?

From Arnaud Isnard, ARCIS: Your question goes to the heart of any market. In real estate, in stocks, in currency... Why would anyone buy something that someone else is selling?

There are two principal reasons for selling: either a need for liquidity at a certain time (not necessarily related to the asset value) or the perception that the asset will be worth less in the future.
 
There are two principal reasons for buying: either a need to put money to work at higher risks for higher potential return or a perception that the asset purchased will be worth more later.
 
You have the same perception at work in the secondary market for private equity. At a certain price, the buyer believes that his purchase will be worth more in the future. This is based on an analysis of the underlying assets, a view of future prospects for underlying investments, including their liquidity prospects (IPO, trade sale, etc), and the timing necessary to achieve these results. Once the risk reward ratio is analysed, a price can be established and, if agreed between the two parties, a transaction can happen.

For his part, the seller either needs liquidity or has the perception that his asset will be worth less in the future than the cash he can obtain today. At times of lower expectations for both sellers & buyers, the discount to valuation tends to increase significantly. On the other hand, at times of higher expectations, a premium to valuation could happen. A good indication of such market expectations can be measured from valuations of publicly traded private equity funds which can trade at a discount or at a premium to their underlying asset value, depending on the market perception at a specific time.

Arnaud Isnard is a co-founder and managing partner of ARCIS. He manages the group's international operations and activities in the US and in Europe. Since 1984, he has been a co-founder and managing director of Venture Capital Fund of America (VCFA), New York, USA. VCFA is a worldwide pioneer in developing the secondary market in private equity.

Founded in 1993, ARCIS is an international asset management firm with offices in Paris, London and New York and specializes in private equity secondaries. Its team of ten includes seven professionals. ARCIS is a member of the Association Française des Investisseurs en Capital (AFIC, the French Venture Capital Association) and the European Venture Capital Association (EVCA).