Notwithstanding recent market gyrations, family offices are becoming more interested in the secondary market for hedge funds and private equity, says a leading practitioner.

As 2010 progresses and the credit crunch has eased somewhat, it would be logical to assume the trading volume in the secondary market for hedge funds and private equity would be dropping off. Not so, says one of the more established firms in this space.

Indeed, the secondary market is busier than ever, argues SecondMarket’s Jeffrey Bollerman, who says 2010 has seen the biggest spike in activity yet.

“Following the Yale model - as family offices and high net worths have done - has resulted in more secondary market activity because they were overweighted in alternatives,” Bollerman told this publication in a recent interview. “You get into these investments and you’re locked in for up to ten years. This is the only avenue out. There was a big spike in activity in 2008 and it got quieter in 2009. But this year, the numbers we’re seeing are even bigger.”

At the beginning of 2009, SecondMarket had 2,500 registered buyers and sellers on its books. A year later that number had increased to 6,500. When Bollerman and his colleagues counted in late August, the figure had ballooned to 15,000. This year, however, it’s not just institutions knocking on the door.

“We’re finding more and more family offices are coming to us,” he said. “Sometimes it’s preliminary - they’re feeling their way through the process because they have investments they’d like to move out of if possible. We think they are finding us to be useful eyes and ears in the market. We also have more HNW individuals coming in - often an advisor will make an introduction and it catches their interest.”

The family offices are looking to pare down their PE or hedge fund exposure, or sometimes just cut down the number of managers they work with, Bollerman points out. He thinks one reason they are coming to SecondMarket is because the firm only charges a fee if there is a completed transaction. Accessing information, listing a holding and bidding for a holding are free on SecondMarket.

“The family office market may have been underserviced up to this point because they are too small for the sell-side institutions that normally work this space,” he said. “Maybe they tried to do it themselves and got burned. It’s very labor-intensive to sell these investments - an intermediary will more than pay for itself. We are large and diversified enough to the point where we can compete on price.”

“Selling a limited partnership holding is not something to do on your own as you are highly unlikely to get the best price. Also, all intermediaries are not the same and it’s very easy to be overcharged, especially when you think you need an investment banking relationship to get this done when you very well may not.”

The process of selling is relatively straightforward and can take as little as two weeks or as long as two months. The firm first contacts the general partner to let them know a holder wants to sell, and obtains permission. Once that is accomplished, the firm can then market the holding to their list of buyers and hold an auction if necessary. When a sale agreement is reached, the firm arranges all the details and finally wires the proceeds to the seller.

“It’s all done very discreetly and anonymously,” Bollerman said. “We’re very successful at finding buyers and getting the best price.”

As the year winds down, other influences could push up trade volumes. The Volcker Rule is likely to drive activity as banks stop prop trading and must find other ways to remove certain investments from their balance sheets. Also, the banks' move to compliance with Basel II rules could have the same effect. And Bollerman said that another dip in the economy could push more people to sell as well.

But even as the economy inevitably improves, Bollerman believes the secondary market will not fizzle  – it’s here to stay.

“There used to be a stigma associated with it, but that’s now gone,” he said. “When you have Harvard, Stanford and other blue chip investors entering the market, the stigma goes away. Trading on the secondary market is now an acceptable way to actively manage your illiquid assets. Once you start trading in the secondary market, you keep it up, you won’t just quit when you’ve sold off one or two investments.”