SWFs Bringing Liquidity to the Illiquid

Ashby Monk

I was very interested to see Temasek’s sizeable investment in SecondMarket, which is a market maker and broker for illiquid assets. SecondMarket facilitates the trade of such assets as LP interests, CDOs, MBS, and even private corporate stock among other things. In my view, SecondMarket has a bright future, as there is a growing appetite for these types of secondary market transactions.

On the one hand, we’ve just come through a liquidity crisis, which means that many investors have been desperate to sell their illiquid assets. For example, Second Life has apparently seen its inventory of assets spike from around $100 million in 2007 to close to $25 billion today. Remember Stanford University’s problems in this regard?

On the other hand, over the past decade we have seen the entry of SWFs onto the scene; these are perhaps the longest-term investors in the world. SWFs are thus actively looking for investments that offer “illiquidity premiums” to match their long-term investment horizon. SWFs’ appetite for PE came through quite clearly in our survey of SWFs’ own asset managers. See the recent CIC / Apax deal as a potential example of the appetite for secondary market demand of PE LP interests.

As an economic geographer (…someone who is interested in mapping new economic activities and spaces…), I find the rise of these innovative market makers / brokers fascinating; they are facilitating markets and trade that might not have otherwise occurred. Before I started this SWF project, I did a separate research project on the growing world of “patent brokers”, which offer similar services for a similarly illiquid, and increasingly traded, asset class. What I said about patent brokers seems to apply to SecondMarket as well:

“These intermediaries form the heart of a new innovation infrastructure that is tailored to the needs of firms competing in the knowledge economy. Intermediaries facilitate the growth of this new space by overcoming certain coordination problems.”

Though, in this situation, I would replace “firms competing in the knowledge economy” with “long-term investors”. In any case, the SecondMarket investment is an interesting development. Apparently, the firm rebuffed numerous offers of financing over the years until now, which suggests that they view the Asian investors as an opportunity to expand overseas:

“Until now, the six-year-old company has run trading platforms only for U.S. assets, but the investment by Li and Singapore’s sovereign wealth fund Temasek Holdings will likely create new exchanges for illiquid assets in Hong Kong and elsewhere. That should increase the number of potential buyers and sellers for SecondMarket’s existing inventory. Even more importantly, it could provide additional liquidity in China’s private companies and red-hot real estate market.”

Watch this space…

2 Responses to “SWFs Bringing Liquidity to the Illiquid”

  1. 1 rien huizer March 1, 2010 at 2:12 pm

    What do Li and Lee know others do not?

  1. 1 SWFs Moving Into Illiquid Assets « Oxford SWF Project Trackback on August 25, 2010 at 11:38 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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