1. Pricing will fall
Fund stakes traded at the second-highest quarterly level on record during the second quarter of 2016, according to a report by Credit Suisse. Fortunately, there may be relief in sight for buyers next year: discounts will widen as interest rates rise and the cost of debt becomes more expensive, according to a New York-based source at a large institutional buyer. Couple this with a slowdown in distributions and increased uncertainty of continued stock market growth, and discounts to net asset value for LP interests could drop as much as 5 percentage points, leading to a possible rise in deal volume – possibly a record high year, the source said.
2. In Europe, political volatility and uncertainty will help buyers
The implementation of Brexit, presidential elections in France and federal elections in Germany may lead to lower pricing – a good thing for secondaries buyers, according to Christophe Simon, partner and head Idinvest Partners' private funds group in Paris. One thing that could counterbalance this is the high level of dry powder held by secondaries funds, which could maintain high pricing levels next year, Simon noted.
3. In Asia, a meaningful GP-led restructuring will close
While the region saw what is understood to be the first successful fund restructuring this year – Committed Advisors was the lead buyer in a process run by Eaton Partners – that deal hasn’t caused a seismic shift in the market just yet. Several other processes were underway as of December, and a deal involving more than $100 million in traded stakes will close next year, paving the way for more transactions, according to Tim Flower, managing director in HarbourVest Partners’ Hong Kong office.
4. Bifurcation will spread to the buyside
As competition for assets increases both in terms of pricing and bidders, sophisticated buyers will break away from the pack.
“There will emerge a visible and greater divide between the savvy buyers who will influence the market and the generic buyers who are playing defence, as reflected in performance, deployment and team turnover,” said the New York-based institutional buyer. Expect more people will jump ship and change firms in the coming year.
5. Latin American secondaries will open up
Brazil, in particular, has been a market where political and economic turmoil have led to a pause in deals. Cracks are starting to open up and opportunities are appearing, said Tom Kerr, a managing director at Hamilton Lane. The region could provide annual dealflow in the hundreds of millions, if not billions, as fatigued investors stuck in regionally-focused funds seek liquidity, which could take the shape of fund recapitalisations.
“This is a market that is ripe for activity that has been nascent for a couple of years,” Kerr said. “There will be some big transactions that will happen as folks look to take a risk-on approach to Brazil.”