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Secondaries transaction volumes are set for another record year. According to advisor Greenhill, they hit $42 billion in the first half of 2019, 56 percent up on the same period of last year.
The amount of capital being raised for the strategy suggests a drop-off is unlikely. July saw Strategic Partners VIII hold final close on $11.1 billion, the first of several huge secondaries funds in market to wrap up. Lexington Partners and Ardian, targeting $12 billion, the joint-largest pools yet raised for the strategy, are to close imminently.
These firms, along with other giants in market such as HarbourVest Partners, Coller Capital and Goldman Sachs Asset Management, are clearly finding limited partners receptive to their offerings. Yet this year’s investor sentiment survey suggests that things could be turning.
Just 33 percent of survey respondents say they are planning to commit to a private equity secondaries fund over the next 12 months, 43 percent say they are not and 23 percent are unsure. Only 15 percent of respondents report they are planning to commit to a real estate secondaries fund, 15 percent to an infrastructure fund and 11 percent to a private debt fund.
Twenty-nine percent of private equity investors are planning to buy, sell or do both in the next 12 months, with 71 percent doing neither or don’t know. In the other three asset classes, a combined 80 percent of investors are neither buying nor selling or are unsure.
Secondaries fundraising has always been lumpy, dominated by the largest names. Their success is due to relationships built with GPs over the years as well as the large amounts of fund data they’ve accrued, which allows them to quickly and accurately price a wide array of stakes.
Sunaina Sinha, managing partner of secondaries advisor Cebile Capital, said at the start of the year: “I think we’ll see a big bump in 2019. We’ll probably see 2020 as another down year for fundraising volumes because all of the small guys combined can’t match the volume of these $10 billion to $12 billion fundraises.”
A bright spot is that 11 percent of respondents are planning to commit to private debt secondaries, a strategy so new that there is only vehicle completely dedicated to it, managed by Pantheon, and one set to be raised, managed by Tikehau Capital.
“The private credit secondaries market is enormous, arguably bigger than the $75 billion private equity secondaries market,” said Jeff Hammer and Paul Sanabria, now global co-heads of Manulife’s secondaries business, in August.
That few real estate and infrastructure investors are planning to sell on the secondaries market is unsurprising. These investors value income generation over a long period of time, so would be less tempted to opportunistically sell a portfolio of assets, even if the price was right. That 40 percent of private equity investors have no intention of buying or selling is a little more concerning. For many LPs, selling a portfolio of stakes just means more cash that has to be deployed elsewhere.
The data are also indicative, however, of the way the secondaries market has changed. GP-led deals accounted for $14 billion of transaction volume in the first half, equivalent to around 33 percent of total volume, and double the $7 billion they represented during the first half of 2018. GPs are now some of the biggest sellers, accounting for 33 percent of all sales by value in the first half of 2019, Greenhill notes.
More than 40 percent of respondents have not taken part in one of these processes. Of those that have, a small majority believe they had enough time and information to make the right decision. The issue of cost is a sticking point, with 29.2 percent believing the costs weren’t fairly divided, compared with 28.5 percent that did. This is something for secondaries buyers, GPs and advisors to chew over.