Despite the secondary market failing to live up the hype predicted of it towards the end of 2008, institutional investors remain upbeat about opportunities there.
Research published by UK placement agency Almeida Capital shows that three quarters of all LPs surveyed (250) are looking to make purchases on the secondary market in the next year, with 55% having already done so.
This interest has been sustained by the belief that distressed sellers are set to swamp the market with cheap assets, which has tempted experienced primary investors into the secondaries arena, indicating that sellers now have a much wider pool of buyers to exploit.
The problem is that vendors and buyers are still some distance from seeing eye to eye on price. “Many of the buyers that have entered the market over the last year are bargain-basement hunters who are offering prices that are far too low for sellers to accept,” says the report.
There also appears to be a misunderstading on the part of buyers as to why sellers sell. “The short or medium term need for cash is a motive for 26% of sellers today compared to 23% of sellers two years ago. It thus appears that distressed sellers have already exited the market while current prospective sellers are not yet distressed enough to offload assets at current average prices.”
However, sellers themselves may also be labouring under a misconception. Buyers are far from united in the prices they are willing to pay for secondary assets. According to Almeida, pricing spreads for funds raised in 2005 to 2007 vary from a premium of 10% to discounts of more than 70%.
The results also show that investors believe the best time to buy is fast approaching – Q4 this year – with the best time to sell coming in Q2 2010.