Setter and the secret secondaries

The prevailing wisdom in the secondary market is that dealflow has been down this year, thanks in part to a lack of big portfolio deals. Indeed, Cogent Partners recently suggested that volumes totalled $7 billion in the first half, a 50 percent drop from the same period in 2012. 

But a recent survey by Toronto-based Setter Capital paints a far rosier picture: it puts total deal volume for the first half of the year at $15 billion and predicts a total of about $18.5 billion in the second half of this year. The latter is broadly in line with the second-half predictions of Cogent and Triago, with the former suggesting the total would be somewhere between $18 billion and $20 billion, and the latter going for $20 billion. 

So why is Setter’s number so different? The firm came to its total by approaching 100 of the most active secondaries buyers, and asking them to complete a seven-question survey about completed deals, investment focus and likely second-half activity. About 45 percent replied.

According to Peter McGrath, managing director at Setter Capital, the truth is simply that most people underestimate the scale of the secondary market. “I just think that the secondary market is bigger than we’re all giving it credit for. There are so many deals that go on that fly below the radar screen [and] are unintermediated, with non-traditional buyers [and] groups like that.”

McGrath admits the results were surprising. “We were a little worried, [because] it seemed so much different than what was reported before. So we went back to every participant saying: ‘Are you certain about this? Will there be any adjustment?’ And everybody said: ‘No, those are closed deals’.” 

Still, many in the market remain unconvinced. “I think this is an interesting study – from a well-respected source with strong market credentials – but the numbers look surprisingly high,” says Andrew Hawkins, founder and chief executive of NewGlobe Capital. “The results obviously catch the eye, but I suspect this may be partly the consequence of extrapolating from a small-ish pool.”

“Instinctively I would have expected a somewhat lower figure for H1 – maybe $10 billion – [although] there is not perfect data anywhere. [And] if that is so, to get to the $18+ billion volume in the second half requires some heroic assumptions,” he adds. 

One issue is working out how deals should be counted, according to Philip Tsai, global head of UBS secondary advisory group. “Sometimes, deals are mostly closed in one year and a small percentage of a deal is closed the following year.  If you ask a buyer as a general question in a survey, they may say the whole deal size was done in the current year the survey is being conducted which can potentially distort the numbers and risk double counting.” 

Then again, it can be very hard to track precise volumes in the secondaries market, since a lot of transactions take place without the involvement of intermediaries. And if deals are not disclosed, they cannot be formally tracked.  

Happily, the one thing on which everyone does agree is that activity appears to have picked up in the second half of this year (including “an immense amount of traction for direct deals,” according to Hawkins). But whether this will add up to $18.5 billion – or anything like it – we may never know for sure.