Opalesque Industry Update – The launch of the London Private Equity Futures and Options Exchange (PEFOX) in the next
month is the manifestation of a silent movement in the private equity industry, which in recent years has seen the
boundaries of “secondaries” pushed to their natural limits. PEFOX is able to offer its members, for the first time, the
chance to take long or short positions on private equity funds, discreetly and independently of the fund manager. In
what the firm’s management describes as a “synthetic revolution” in private equity, PEFOX is working with some of
the most prominent institutional investors in private equity to establish an active and liquid derivatives market,
distinct from the existing primary and secondaries space.|
Recognising the way derivatives markets have emerged in almost every quarter of the financial world and eventually gone on to transform investments such as commodities, bonds and listed equities, Kishore Kansal, the Managing Partner of PEFOX, brought together a group of private equity industry veterans with the intention of replicating this in private equity. “The attractions to investors are obvious. Gaining access to the most sought after funds or hedging out exposure to partnerships or entire portfolios, PEFOX enables investors to actively manage a private equity portfolio”, explains Ray Maxwell, the former Managing Director of INVESCO Private Capital and the Chairman of PEFOX. “This is about providing the market with additional tools to manage liquidity and risk”.
“The secondaries market has grown rapidly in both breadth and depth in recent years. Secondaries became more and more complex until some of the larger, more sophisticated groups started doing ‘transfers of economic interest’”, explains Kishore Kansal. “The economic interest in a fund is transferred to a buyer but the seller retains nominal legal ownership. This was a derivative structure in all but name and, by definition, went beyond the technical boundary of what could have been achieved through a secondary sale.” Kishore Kansal describes this as just the starting point on a derivatives spectrum. “PEFOX provides such structures but has developed the concept further. PEFOX has created proprietary, standardised futures contracts covering all major private equity funds, which allows investors the chance to access a global marketplace where they can enter into long or short positions on funds, something which is totally discreet and independent of the fund manager”.
The Advisory Board of PEFOX includes a number of experienced, industry renowned thought-leaders. “For the first time, secondary funds, fund of funds and other institutional investors will be able to utilise derivatives to reduce volatility and rebalance risk in their portfolios.” states Andre Jaeggi, a former partner of Adveq and one of the first to join PEFOX’s Advisory Board.
Kishore explains that this is by no means a new thought. “Various investors have been looking at creating something like this for over a decade, but it didn’t take off for a couple of reasons. First, this is the type of market that really needs an independent and impartial organisation such as PEFOX in order to function. It just doesn’t work when the buyer tries to deal directly with the seller. Second, previous attempts have failed because of a fundamental lack of liquidity.” Kishore describes how current market conditions may have changed that equation in PEFOX’s favour.
“After the financial crisis, investors in private equity really began to question the wisdom of being locked into a blind pool for eight years plus, with little or no chance of liquidity. Like the Emperor, they found themselves both naked and over exposed. Like it or not, we now live in a time of significantly higher volatility and this is something which investors can no longer ignore.
Commenting on the early progress that has been made, Kishore concludes “PEFOX is able to provide its members with liquidity solutions and more elegant tools to manage risk. Quite simply, this is appropriate for the markets in which we find ourselves”.