Deal volume for the first half of the year fell by 20 percent to its lowest level in three years, due to macroeconomic volatility and political shocks, according to research by investment bank Greenhill Cogent, and reported by Private Equity International 's sister publication, Secondaries Investor.
An accelerated decline in crude oil prices, the S&P 500's worst start to a year, Brexit, and growth fears in China all contributed to the drop in trading on the secondaries market. Trading fell to $12 billion in the six months to June, down from $15 billion a year earlier, Greenhill wrote in its July 2016 Secondary Market Trends & Outlook.
“The macro volatility impacted the secondaries market by fostering uncertainty regarding asset values and near to medium-term exit environments, and created the desire to wait to see how the macro environment would impact March and/or June NAVs,” the report noted.
Greenhill estimates that there is around $65 billion in dry powder, up from around $58 billion at the end of 2015, and this is expected to continue to drive high pricing and benefit sellers in the second half.
“The supply/demand mismatch has created an environment where buy-side participants are on average below their target deployment pace for 2016 and are eagerly expecting an increase in second half activity to offset the effects of a slower first half,” the report added.
Greenhill estimates that there were more than 20 GP-led transactions during the first half, accounting for around 30 percent of the market. This was driven by lower amounts of LP portfolio sales – only two deals larger than $1 billion during the period, compared with three a year earlier – and the expansion across asset classes for such deals, with energy and infrastructure fund restructurings expected to grow.
Public pensions were the biggest sellers by volume, accounting for 42 percent of deals, up from 35 percent the previous year. Endowments and foundations, whose deals represented less than 10 percent of the market by volume, were the most frequent sellers by number, accounting for over a quarter of the market.
Britain's decision to leave the EU has had a limited impact on buy-side demand and pricing for European secondaries, with the exception of funds focused solely on UK assets or those denominated in sterling, the firm wrote. On the sell-side, uncertainty related to Brexit caused potential sellers to postpone launching deals in the hope that stability will return in the second half, the report noted.