Secondaries offer a new lease of life

The secondaries market has been enjoying a boost from tail-end fund liquidations that insiders expect to continue.

Globally, around $964 billion of unrealised value is lingering in private equity funds nine years or older, according to data as of 30 September from NYPPEX Private Markets, a secondaries broker. In Europe, advisory firm Campbell Lutyens estimates more than 700 funds will soon reach the end of their lives.

That’s having an impact on both the core secondaries market – the buying and selling of fund stakes – as well as direct secondaries, or purchases of assets from sponsors, and GP-led transactions including fund restructurings.

Last year, 60 percent of buyout fund stakes sold on the secondaries market were six to nine years old; that’s a big change from five years ago, when funds that old comprised 16 percent of transaction volume, according to Greenhill Cogent’s latest market report.

“Increasing fund ages and longer investment durations are undeniable facts in the current market,” Cogent noted. “As such, the supply of tail-end transactions in the market has only one place to go – upwards.”

Recent deals include Ardian’s purchase of €100 million-worth of 2006- and 2007-vintage stakes from Nordea Group. On the direct side, HarbourVest Partners paid €400 million to purchase a number of residual portfolio companies in Bridgepoint’s 2005-vintage Fund III.

Deal volume for directs was $10.2 billion in 2015, according to a survey by Toronto-based advisor Setter Capital. While the figure represents a 7.3 percent decrease year-on-year, respondents to the survey said they felt more managers had attempted to liquidate or restructure older funds in 2015, compared with 2014.

“Direct secondaries are growing significantly,” Fabrice Moyne, a partner at Paris-based fund of funds Mantra, tells Private Equity International. “Many [secondaries] funds that historically were doing almost exclusively LP stakes are going to be doing a lot more direct secondaries, and some of these through fund liquidations.”

GP-led transactions for older funds – such as Newport Global Opportunities Fund, a distressed debt fund raised a decade ago, giving its LPs a tender offer as part of a restructuring backed by Morgan Stanley, LGT Capital Partners and Neuberger Berman – are also expected to continue.

“The past three years have seen enormous growth in the number of GP-led restructurings,” Jeff Hammer, managing director at investment bank Houlihan Lokey’s illiquid financial assets practice, told sister title Secondaries Investor. “What started out as a trickle of one-off, highly-negotiated deals has become a regular flow of transactions using increasingly standardised techniques.”

In addition to the cyclical drivers, with a generation of pre-crisis private equity funds reaching the end of their lives, a sharpening focus on directs and restructurings also has to do with increased buy-side competition. Cogent estimates there’s roughly $80 billion in dry powder available among secondaries buyers – expect a good portion of that capital to help older funds and assets find a new lease of life.