Second wind

By September, the secondary market was well on its way to beating its 2013 fundraising total of just over $20 billion. In the first three quarters of 2014, 15 funds dedicated to private equity secondaries investments closed, raising a combined $17.58 billion, according to PEI’s Research and Analytics division.

Since then, Blackstone’s secondaries arm Strategic Partners Fund Solutions has closed its sixth secondaries vehicle on its $4.4 billion hard-cap, smashing through its $3.5 billion target, while Deutsche Bank’s private equity group closed its DB Secondary Opportunities Fund III on its hard-cap of $1.65 billion.

PEI’s sister publication Secondaries Investor also recently learnt that Landmark Partners is anticipating holding a final close on its 15th private equity secondaries fund on $3.25 billion by year end, and Lexington Partners has already amassed at least $6 billion for its Lexington Capital Partners VIII, which is in market targeting $8 billion. Coller Capital is reportedly targeting $5.5 billion for its new vehicle, and fund of funds Pantheon is seeking $3 billion for its Global Secondary Fund V.

“We have seen a lot of groups raising more,” says HarbourVest’s David Atterbury, noting that not only are the big players going after ever-larger amounts, those at the smaller end are also increasing their fund sizes.

Although the headlines may look worrying, Atterbury says, in reality there are more than enough opportunities to go around.

“There’s just so much in terms of deal flow that it doesn’t feel as if there is a significant overhang of capital on the buyside,” Atterbury says.

Deutsche Bank’s Carlo Pirzio-Biroli told PEI last month that the firm’s increased fund size was indicative of changes in the market. Maturation over recent years means the secondary market is no longer solely the domain of distressed players. As well as LPs looking to liquidate assets for a whole host of reasons – in both up and down markets – larger investors are using the secondary market to tidy up older portfolios.

“[Secondaries have shifted from] a cyclical distressed play toward a robust market where LPs trade for a wide variety of reasons,” Pirzio-Biroli told PEI. “The market has become taller, wider and deeper. The market has more than doubled since 2007.”

Restructurings are also becoming more prevalent, with GPs offloading the last few wayward assets in previous funds so that they can concentrate on managing more recent acquisitions.

Although industry sources say pricing has been hot recently, a maturing market allows firms to explore different strategies and find their own niche, so competition for opportunities is still a lot less fierce than it is in the direct buyout market.

“There’s some similarities in certain places, but many groups have particular types of deal that they prefer to go after, and you’ll see that come through in the portfolio construction of different managers,” Atterbury says. “A big institutional investor will maybe have two secondary providers targeting different parts of the market.”

Once factors such as strategy, deal size and a fund’s own recent activity have been taken into account, in some cases there are only a handful of groups that end up as realistic candidates for a deal.

Intermediaries, therefore, need to work even harder to engage players on transactions – and pricing may eventually start to cool off.

“Secondary funds are having to work very hard to keep up with the volume of dealflow that’s out there,” Atterbury says. “For us the big question that we have is ‘Where do we put our resources?’ because there are so many opportunities. This inevitably means that deals are going to become less competitive and so you can see why after a bit of a flurry maybe pricing will soften over time.”