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Secondaries: Where have all the big deals gone?

Secondary sales of $1bn or more have essentially disappeared in 2013 – but a resurgence is expected before year end.

From just about every angle, the private equity secondaries market looks very different today than it did in 2012. Deal volume is down, and pricing has been getting stronger, according to secondaries broker Cogent Partners.

One of the most significant changes during the past year has been a lack of the large secondary portfolio sales that were commonplace in 2011 and 2012. Last year, China’s State Administration of Foreign Exchange (SAFE) bought a portfolio of private equity stakes from General Motors’ pension plan for somewhere between $1.5 billion and $2.5 billion, while Swedish life insurance company Länsförsäkringar sold a €1.5 billion private equity portfolio to two buyers – the Abu Dhabi Investment Council, which bought the bulk of the offering, and Australian institutional investor QIC. 

Then there was Lloyds Banking Group’s sale of a £1 billion portfolio to Coller Capital, the State of Wisconsin Investment Board’s offloading of a portfolio of 12 private equity funds for about $1 billion and the California Public Employees’ Retirement System sale of at least $1 billion of private equity interests.


One reason for the drop in big-ticket secondary deals this year has been the healthy environment for asset sales on the primary side. A strong level of exits meant distributions to limited partners hit $48.6 billion during the fourth quarter of 2012, the largest quarterly distribution on record and a 123 percent increase on the previous quarter, according to Cambridge Associates. Total distributions for the year stood at $118 billion, also the highest figure in the 27 years since the inception of Cambridge’s US Private Equity Index. This reduced any pressure to sell.

“You’ve had strong exit routes and a refinancing market that’s been very prevalent in the US,” says Stephen Ziff, a partner at Coller Capital. “I suspect that’s encouraged institutions that were perhaps thinking about disposing of private equity assets to defer that decision a little bit.”

Other factors contributing to the lack of large secondary deals include rising valuations at publicly-listed companies. “When markets go up, people defer any decisions because they’re seeing liquidity,” Ziff says. 

There have been a limited number of large secondary sales in 2013. AlpInvest Partners recently purchased up to €800m of private equity assets from HypoVereinsbank, the German subsidiary of Italian bank UniCredit. Lexington Partners also reportedly purchased a $648 million portfolio of private equity fund interests from Assicurazioni Generali in July. 

However, in general this end of the market has been quiet, which raises the question: how will big-ticket secondary investors be impacted?

“Secondary buyers managing very large funds rely on big portfolio transactions to put money [to] work,” says Philipp Schnyder, managing director and co-head of private equity secondaries at Partners Group. “The lack of such transactions, if this continues, might represent a major hurdle to their strategy and positioning.” 

New regulatory regimes (including Basel III in Europe and the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US) fuelled predictions that banks would need to offload enormous volumes of private equity fund interests and direct investments on the secondary market. But significant uncertainty remains about when financial institutions will need to comply fully with new regulations. 

US banks have until July 2014 to comply fully with Dodd Frank. Final rules for Basel III are scheduled to go into effect between 2015 and 2018, although an exact timetable is difficult to quantify given the various possible extensions.
 “Some groups are still waiting to see final regulations,” says Todd Miller, managing director at Cogent. “There is no pressure right now to do a deal. There’s no liquidity issue and for most limited partners there’s not an allocation issue. It’s really just a clean-up and [portfolio] management issue.”


One relatively recent development in the secondaries market is the increasing extent to which general partners are using secondaries to restructure funds that have reached the end of their contractual lives. 

“If you talk to all the buyers, everybody’s working on $100 million to $300 million fund restructurings, and nobody was doing those two years ago, so the mix is changing,” says Ian Charles, partner at Landmark Partners. 
“About a third of last year’s volume was in transactions that were over $750 million, so if that contracts by half, you lose $4 billion of large portfolio trades. We believe there will be at least $2 billion to $3 billion of fund restructuring trades this year to make up that gap.” 

Despite the lull in secondary deals during the first half of 2013, there are a number of reasons to expect a rebound in activity during the last six months of the year. For one, secondary activity has historically been more prevalent during the third and fourth quarter. 

“Most people come to the market in the fall,” says Hugh Perloff, managing director with Portfolio Advisors.
Canada’s Public Sector Pension Investment Board, which oversees about C$76 billion in total assets, is in the process of shopping a private equity portfolio of around eight funds valued at about $1 billion, according to four secondary market sources. The portfolio is being brokered by Cogent Partners, the sources said, though Cogent declined to comment on the situation.

“Intermediaries have been very busy educating potential sellers and pitching for transactions over the past nine months, which may trigger an increased supply of large transactions in the second half,” says Partners Group’s Schnyder. “However, such a resurgence would also depend on a return of volatility to the market and on whether portfolio distributions slow down. In a period of volatility, when valuations are fluctuating, then I think that would encourage people to pursue [secondary] sales.”


Even with higher volatility in the second half of the year, it is unlikely that total deal volume for 2013 will recover sufficiently to match the record $25 billion of deal flow of 2012. 

Nonetheless, many secondary market participants are gearing up for increased activity in the coming months. “Our own pipeline looks very robust for the second half,” says Landmark’s Charles. 

Perhaps the most telling statistic pertaining to future secondary activity is the estimated $70 billion of combined net asset values that financial institutions will, at some point, have to part ways with. “There are still a lot of big portfolios that need to be sold,” Charles says.

Equally on the buy side, while most secondaries investors are targeting small to medium-sized transactions, large groups such as sovereign wealth funds need to put money to work in much larger amounts. “They’re not going to buy $100 million or $200 million portfolios,” says Cogent’s Miller. “They want to do the big deals.” 

At press time, activity was already showing signs of a rebound. “In the last few weeks, it has gotten materially busier,” Miller says. “I think you’ll see a much busier second half of the year than the first half.” And those billion dollar portfolio sales? “I think they’re coming back.”