Following is an
edited transcript of a Q&A session between
Marshall Greenwald and Larry Wonnacott, Partners in Symmetry
Investments Inc., and Robert Wells, a former business editor
with Knight-Ridder Newspapers.
Page 1 of 3
Is there some significance to
the name “Symmetry”?
The word “symmetry” – overused as it probably
is – actually reflects one of our core values: that there
should be an “alignment of interests” between ourselves
as fund managers and our investors. We’ve both spent many
years with the shoe on the other foot – when we were the
ones investing our clients’ money into private equity partnerships.
Based on this experience, we’re committed to treating our
investors the way we’d expect to be treated. Examples are
our partnership terms, which are extremely limited partner-friendly,
and our management fees, which are among the most reasonable
in the industry. Our own compensation is contingent on our investors
earning an outstanding rate of return; if they make money, we
make money. We wanted a name that articulated this philosophy,
and we felt “Symmetry” did that.
You’ve chosen to work exclusively
in the secondary private equity market. Why?
After spending years making both
primary and secondary partnership investments, it became clear
to us that purchasing interests in partnerships that had been
around for several years had some very compelling return characteristics.
When you acquire positions in the secondary market, you’re buying into a portfolio
where most of the investments have already been identified, i.e.,
it is not the typical “blind pool.” By being able
to see and evaluate the companies in each partnership, we are
better able to assess the ultimate prospect for the partnership.
In addition, by buying these interests a few years after their
formation, we are often able to bypass the “J-Curve” phase
incurred by newly formed private equity partnerships – the
initial period in which their asset value tends to decline because
they are incurring some costs while the young companies in their
portfolios are not yet producing increased valuations.
Why do people sell private equity portfolios or portfolio
Historically, 2-3% of the commitments
made to primary private equity funds in any year have traded
on the secondary market before the final liquidation of a fund.
In the past, most of this activity was driven by a seller’s financial distress,
a merger, or regulatory changes. Recently, we have seen that
percentage begin to rise as more investors adopt an “active
portfolio management” style – selling underperforming
or non-core assets in order to allocate their capital elsewhere.
As the market has become more efficient and prices have risen,
the volume of secondary-market transactions has risen.
Why have you chosen to focus on the smaller-transaction end
of the secondary private equity market?
Because we see inordinate opportunity
there. Our definition of small is portfolios that range in
size up to $20 million and individual interests valued at under
$4 million. The small end of the secondary private equity market
is less efficient than the large end for two reasons: fewer
buyers and fewer intermediaries. As to buyers, most of the
secondary market’s dollar volume
comes from giant funds with over $500 million in assets, for
whom it’s simply not practical to evaluate and acquire
small (under $10 million) holdings; those deals are off their
radar. As for intermediaries, there’s a very active group
of companies that have emerged to facilitate large secondary-market
transactions by staging multi-bidder auctions. But smaller transactions
are not of interest to them, either. This leaves the field pretty
wide open for us to cultivate contacts with sellers, and potential
sellers, of relatively small portfolios and individual limited
I guess the big buzzword is “deal flow,” right?
How do you maximize your exposure to “deal flow”?
Is there a jungle telegraph of some sort?
Nothing mysterious. It’s just a result of years of
working with people in the business. We have three primary sources.
The first are a partnership’s general partners; they are
usually the first person a smaller limited partner will call
if they wish to sell a position in a partnership. Second are
people at the larger secondary funds; they show us potential
deals when a portfolio they are considering contains smaller
interests that are not economic for them to value, acquire and
manage. We maintain active contacts with these groups. Third
are intermediaries that are engaged by a limited partner to sell
a portfolio either in its entirety or, quite frequently, to break
it into multiple portfolios, based on their investment characteristics.
Judging from our ongoing communication with all of these contacts,
we’re convinced there will be sufficient deal flow to enable
us to invest our new fund within its four-year Investment Period.