The secondary market ground to a near-halt (relatively speaking) in the first half of 2013 compared to the prior two years, with total transaction volume tallying around $7 billion, according to Cogent Partners' first half pricing report.
Deal activity on the secondary market hit record levels of about $25 billion for both 2011 and 2012, with the market transacting about $13 billion during the first half last year.
That dynamic has changed this year, and the slowdown came despite the environment being ideal for sellers, with pricing robust and secondary buyers flush with more than $35 billion of dry powder, Cogent said.
“With [net asset values] rising and secondary buyers actively seeking to deploy more than $35 billion of dry powder, current market conditions have been nearly ideal for potential sellers,” the private equity investment bank said in its report. “The question therefore remains: ‘how long will this seller-favorable window remain open’?”
The question therefore remains: 'how long will this seller-favorable window remain open'?”
Sellers are choosing not to sell for a few reasons, including healthy public markets and strong distributions, which are giving institutions more leeway to hold their LP stakes. In fact, as public markets rise, so to do NAVs, and potential sellers are reluctant to offload holdings that could potentially increase in value quarter-to-quarter.
Pricing has gotten stronger over the past few years. In the first half of 2013, the average high first round bid for all funds increased to 84 percent of NAV, from 80 percent of NAV in the second half of 2012, according to the report. Those overall numbers were led by buyout funds, which received average high pricing of 89 percent of NAV.
“The rise in overall pricing is not surprising given the increase in public equity prices during [the first half of 2013], combined with the lack of secondary supply, which has led some buyers to be more aggressive with their bids,” Cogent said.
The types of sellers driving market activity has changed. Whereas for the last few years big public pensions and financial institutions have provided the bulk of product on the market, those institutions have played a smaller role in 2013. This year, public pensions and financial institutions account for about 25 percent of the sellers in the first half, down from nearly 50 percent in the second half of 2012, Cogent estimated.
Meanwhile, the number of GP-led secondary deals like restructurings has risen, comprising about 40 percent of market activity in the first half, Cogent said. “As many funds raised in the late 1990s and early 2000s approach or extend past the end of their finite terms, managers are now increasingly proactive with respect to alternative liquidity methods that both alleviate timing pressure and expedite the return of capital to their investors,” the firm said.
Still, Cogent predicts the market could come in around $18 billion to $20 billion for 2013 as LPs take advantage of the strong market in the latter half of the year. “We believe the recent slowdown in secondary transaction activity is only temporary. Given the significant amount of secondary capital raised to date, the large number of investors with legacy and/or allocation issues and an increasing tendency for LPs to activity manage their illiquid portfolios, we project an uptick in transaction activity over the near-term to levels seen over the last few years,” Cogent said.