Secondaries move through potentially busiest-ever first half

  • First-half 2017 potentially busiest secondaries period ever
  • Setting up for record volume this year
  • Mix of deal types in market

Earlier this year, Harvard’s $37.6 billion endowment was reported to be seeking to sell up to $2.5 billion in private equity and real estate funds as it consolidated its portfolio and restructured its team.

This came on top of Ardian’s $2.5 billion investment in Mubadala Capital, the investment group of Abu Dhabi sovereign fund Mubadala Development. That total included a $1.5 billion primary commitment for a PE fund by Mubadala Capital, as well as the secondary sale of fund interests from the fund’s portfolio.

The two sales are the largest traditional private-asset transactions so far in a year marked by a strong uptick in activity. Deals are flowing across traditional secondaries and GP-led liquidity processes built up since last year, when activity stagnated due to external events.

Balanced, healthy market

“We’re seeing a bit more deal flow over what we saw last year,” said Paul Lanna, a partner with Coller Capital. “We feel pretty good about it. The market feels pretty balanced, pretty healthy, pretty active, and there’s a lot of capital being raised.”

“This is the busiest, biggest time ever, that’s in terms of the number of opportunities,” said Daniel Benin, founder and managing partner of Committed Advisors.

Three types of deals are fueling market activity this year: sales of traditional LP stakes, GP liquidity offerings like restructurings and spinouts, and funds-of-funds selling older fund stakes to get LPs liquidity.

A few reasons account for the strength of activity in the market this year, sources told Buyouts. One big factor is that this year sellers are taking the opportunity to rebalance their portfolios, culling relationships down to only their core partners. “Pricing has been pretty full, so it’s a good time to be a seller, a good time to rebalance,” Lanna said.

In addition, inventory appears to be ramping up. Primary funds from strong fundraising years in 2010 and 2011 are starting to trickle into the secondary market as those funds head toward the end of their investment periods, Benin said. Those funds “are now mature enough to get disposed on the secondary market,” he said.

Those older funds also present opportunities for GP-led processes like restructurings and fund recapitalizations, he said.

One big difference this year is that in 2016 the market seemed to pause a few times because of external events. This year hasn’t seen such events, at least so far.

For one, Britain’s decision to exit the European Union roiled markets, depressing secondary-market activity, sources said. As well, oil prices dropped to as low as the mid-$20s a barrel earlier in 2016, and the market was spooked about a potential devaluation of China’s yuan.

“For three of the four quarters, there was some big macro shock. That’s why volume was down,” said a buyer on the secondary market. “If our data is right, this is one of the biggest first halves ever … setting the stage for record volume.”

“We’re working on restructurings, tender offers and fund wind downs, in the buyout, venture, real-assets and credit spaces. It’s not just one type of deal,” said Brian Mooney, a managing director and co-founder of Greenhill Cogent, a secondary adviser.

“Further, all types of institutional investors are being opportunistic on the sell side right now. … They’re taking the opportunity to monetize things that are non-core.”

Half-year numbers aren’t out yet, but most sources believe private equity secondary volume will exceed $40 billion this year.

For last year, Cogent pegged total PE secondary volume at about $37 billion, down about 10 percent from 2015. Evercore also put total volume at $37 billion, down 12 percent from $42 billion.

Intermediary Setter Capital put total 2016 secondaries volume, including PE and real estate, at $42.1 billion. That was down 15 percent from $49.6 billion the prior year. PE secondaries dropped 7.7 percent to $34.8 billion, Setter said earlier this year.

Pricing, meanwhile, remains robust. Across 307 leveraged buyout funds, average top pricing over the 90 days ended May 31, 2017, stood at around 96 percent of net asset value, according to Setter. That’s an about 4.4 percent increase from 2016, the firm’s May pricing report says.

Capital flowing

Market activity is not likely to slow, considering the amount of money being raised for the strategy. Last year, 22 funds raised $25.6 billion, the second-largest amount raised for the strategy since 2000. The peak year was 2014, when 29 funds raised $26.6 billion, according to alternative-assets-data provider Preqin.

This year could be on track to become the record year for secondaries fundraising. So far, 13 funds have raised $22.9 billion, Preqin said. The biggest funds include Blackstone Group-backed Strategic Partners’ seventh fund, which closed on $7.5 billion in February, and Carlyle Group-backed AlpInvest Partners, which closed its sixth secondaries program on $6.5 billion.

In June, Goldman Sachs collected more than $7 billion for its Vintage VII secondary fund, Reuters reported.

Action Item: Check out Setter’s pricing report here: http://www.settercapital.com/

A general view of the Abu Dhabi skyline on Dec. 15, 2009. Photo courtesy Reuters/Ahmed Jadallah