The secondaries market is booming; can it avoid a bust?

With an estimated $200bn in buying power available for secondaries over the next year, Private Equity International examines a strategy that has become mainstream.

Take a look at the state of the private equity fundraising market and you might be surprised at what you discover. As of late August almost half of the 10 largest funds in market were dedicated secondaries vehicles.

By value, secondaries represents 40 percent of the roughly $102.3 billion being sought for private equity. Almost half the capital being sought by the 10 largest vehicles is for buying stakes in other funds.

Private Equity International is gearing up to publish its special look at the secondaries market next week, at a time when there are record figures for fundraising, deal volume, dry powder and pricing in the secondaries market. Both Ardian and Lexington Partners are seeking $12 billion for their latest secondaries funds – a figure that would fall into megafund territory even in the buyout market.

At the heart of our coverage is our latest SI 30 ranking of the biggest fundraisers, which shows the top 30 firms raised almost $200 billion over the last five years, slightly more than last year’s ranking. The list welcomes five new entrants, including a fresh spin-out, a direct secondaries player – a strategy that has evolved from acquiring multiple minority stakes in companies to something else entirely – as well as niche specialists. Specialisation is becoming an increasingly important way to remain competitive in the market, and we examine how innovative deal types such as single-asset fund restructurings, bridge funds and preferred equity transactions have been opening up the market.

Is there too much capital available and being raised for secondaries? The figures certainly suggest a market awash in cash. Including leverage, there will be as much as $200 billion in buying power available between now and the end of the first half of next year, with $64 billion in dry powder as of the end of June and around $77 billion in fundraising plans, according to advisory firm Evercore.

Some believe this isn’t necessarily cause for concern. The market is “broadly in balance” with around one-and-a-half years of buying power available at 2017 transaction levels, Coller Capital founder Jeremy Coller wrote in his firm’s latest annual report in July. “Although the market is undoubtedly very competitive, Coller does not see it as overheating,” he noted.

Others are less confident. The $205 billion Florida State Board of Administration, one of the biggest investors in secondaries, has lowered its return expectations for the strategy due to record pricing and increasing competition, as senior investment officer John Bradley tells us in a Q&A for the special. Bradley is quick to point out that other private equity strategies such as buyout, growth and venture face similar dynamics.

While this may be true, the secondaries market faces pricing at an 11-year high of around a 1-2 percent discount to net asset value on average, and competition is so fierce that some buyers are now pricing deals within a matter of hours, rather than days, in order to beat competitors.

The secondaries market has never been more intense. Keep an eye out for our special next week.

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