Investor Base: An uncertain outlook

The challenges of valuing assets and forecasting performance in the current climate are hampering the secondaries market – but pricing continues to hold up reasonably well

Some predicted that the secondaries market could break last year’s all-time volume record of about $25 billion in 2012 – possibly even topping $30 billion. But it looks as though activity could slow down in the next few months, as the chaos in Europe continues to rattle global markets.

In this environment, some secondary market sources say the task of valuing assets has become more complicated, especially when trying to look five years down the line at potential exit scenarios for underlying portfolio companies in funds.

“Nothing is telling us right now that the environment is getting any better,” says one buyer in the secondary market. “Anything [you assume now] could be invalidated in six to eight months.”

However, activity probably won’t be significantly affected unless the discount spreads to 10 percent or more, according to the buyer. Discounts have hovered in the single digits for 18 months and activity has been brisk.

Pricing, so far, has held up pretty well, according to a number of secondary market sources. Todd Miller, managing director with secondary advisor Cogent Partners, says he has not seen discounts on sale prices increase. Most buyers in today’s market would rather pay only a slight discount to NAV for top assets, rather than pay steep discounts for tailend or broken funds, Miller says.

A recent sale highlighted the strength of pricing in the secondary market. At press time, AXA Private Equity was in the process of closing a deal to buy a $780m portfolio of private equity interests from the Ontario Municipal Employees’ Retirement System. The secondary firm, which recently raised the largest-ever secondaries fund, is paying around 96 cents on the dollar, sources told Private Equity International in interviews.

However, AXA PE is not necessarily an accurate reflection of the market as a whole, because the firm is known to bid high for assets it considers high quality. 

No hard numbers are available yet to measure activity in the market, but sources suggest that volumes are on track to at least match last year’s figure of $25 billion – and possibly even break through the $30 billion mark. But any kind of slow down this summer could clearly put the market off that record pace.