Secondary market hits $25bn for second straight year

Banks with an estimated $70bn of private equity assets on their balance sheets could drive even more deals in 2013, according to the latest report from Cogent.

Secondary market transaction volume reached $25 billion during 2012, matching the record-breaking level of deals in 2011, according to a report from secondaries broker Cogent Partners. By Cogent's count, activity fell slightly over the course of the year, with $13 billion-worth of activity during the first six months compared to $12 billion in the third and fourth quarter.

Limited partners such as endowments and foundations increasingly sold fund interests on the secondary market to manage their portfolios in 2012, but the second half of 2012 saw the volume of financial institution-driven sales decline significantly. After accounting for more than a third of secondary sales during the first half of the year, banks, insurance companies and other financial institutions represented less than 20 percent of secondary volume during the last six months of 2012, according to Cogent estimates.

“Some of that is just the lack of clarity in regulation,” Cogent managing director Todd Miller told Private Equity International. “You’ve got some institutions that are waiting for the final regulations to come out – particularly in the US – before doing anything. They want to know what those are before they pull the trigger.”

A final draft of the Volcker rule, originally due out in July of 2012, is expected to be published sometime in the first quarter of 2013.

Pricing for secondaries remained stable last year, with the average high first round bid for all funds hovering at 80 percent of NAV during both the first and second half of 2012. Pricing for buyout funds was also relatively stable, as the average high bid decreased slightly from 85 percent of NAV during the first half of the year to 84 percent during the second half. 

Buyout funds represented the largest portion of the secondary market according to strategy, accounting for nearly 60 percent of funds marketed. Among buyout funds, demand for natural resource and energy funds continued to accelerate in 2012, according to Cogent, with pricing for such vehicles varying by sub-strategy.

“That is the place over the last several years [where] a good amount of capital has been raised,” Miller said. “As a sector like that raises more primary capital, you will see the secondary market develop. Many groups, such as pension funds, are under-allocated to natural resources.”

Venture capital funds have accounted for between 25 percent and 30 percent of funds marketed on the secondary market during the past two years, driven primarily by older funds. Cogent estimates that more than two thirds of venture funds marketed during the second half of 2012 were more than 10 years old.

With an estimated $70 billion of global private equity assets still on bank balance sheets and more than $35 billion of dry powder dedicated to secondaries, Cogent estimates that 2013 activity could exceed the record $25 billion recorded in both 2012 and 2011.

“We certainly anticipate it being busy over the next 24 to 36 months,” Miller said.