The secondaries market has been busy this year, exploding with activity as financial institutions have continued their regulation-driven divestment of illiquid assets, and public pensions have trimmed back the number of manager relationships in their portfolios. Total deal volumes are expected to top $30 billion this year, according to several market sources, well ahead of last year’s total of roughly $20 billion. And activity is likely to remain strong, according to Ian Charles, a partner with secondaries firm Landmark Partners – unless the market is curtailed by a big “macro-event” like a sovereign debt default.
|Jean-Marc Cuvilly, Triago|
Any kind of institution that has thought about selling down their private equity holdings in the past is probably open to offers at the moment. But banks and public pension systems have been the biggest sellers this year. There were several headline-grabbing sales by banks in the first half of 2011, including AXA Private Equity’s $1.7 billion acquisition of a portfolio of assets from Citi in June. The likes of Citi, Bank of America and Barclays have also sold assets on the secondary market over the past year. With financial institutions under pressure to sell down their private equity holdings because of new regulations, including the Dodd-Frank Act in the US and Basel III in Europe, Charles expects this trend to continue into 2012.
Public pensions, on the other hand, are not necessarily under pressure – but are taking advantage of the friendly pricing environment to scale down their private equity portfolios to more manageable levels. Several US public pensions have been or are preparing to be in the market this year, including the California Public Employees’ Retirement System, the Colorado Public Employees’ Retirement System, state pension systems in New Jersey and North Carolina, and the New Mexico State Investment Council.
Pricing certainly favours sellers at the moment: this year, the average high bid for buyout funds was 91.6 percent of net asset value on a dollar-weighted basis, according to Cogent Partners’ first half 2011 pricing report. The average first-round high bid came in at 84.5 percent of NAV, compared to 84.3 percent during the second half of 2010.
To a lesser extent, endowments and foundations are exploring sales too (though they are pickier about pricing, sources say).
“The truth is that right now everybody’s in the market; it’s not really any specific type of institution,” according to Jean-Marc Cuvilly, managing partner with placement firm and secondaries advisor Triago. “Even traditional buyers are also sellers. There are plenty of funds of funds that are selling assets, usually older vintages [while also looking to buy newer ones]”.