Secondary market slows down in final months

The secondary market had supported deal volume of about $13bn in the first half of the year, but slowed over the summer and hasn’t picked up much velocity in the second half.

It would appear that the secondary market won’t be breaking any records this year.

Deal volume for secondaries is unlikely to surpass the record $25 billion it achieved last year, though it will get close, according to numerous sources in the market. However, most sources believe sellers who put off making investment decisions this year will hit the market in early 2013.

While there is no solid explanation for why deal flow has slowed, numerous sources point to one overall culprit – uncertainty; uncertainty leading up the US presidential election; the volatile situation in the eurozone and the finalisation of various regulations that will affect the industry.

“I don’t want to say people are bearish in general, but no one is really bullish,” said Todd Miller, managing director with private equity investment bank Cogent Partners. “There’s a ton of deal volume to come in the next three to five years.”

Summer slump

As of the middle of 2012, global secondary market deal volume had reached about $13 billion, according to Cogent’s half-year pricing report. While still less than the $14 billion the market had reached in 2011, the half-year activity total still put the market on track to beat last year’s final deal total tally.

However, activity on the market slowed in the summer and hasn’t picked up to a significant degree since, several sources told Private Equity International in recent interviews.

That slowdown has been acutely felt when it comes to the biggest deals in the market, which have all but disappeared in the second half of the year, sources said. Last year, several large transactions helped bolster activity on the market, including AXA Private Equity’s $1.7 billion acquisition of a portfolio of assets from Citigroup and a $740 million portfolio from Barclays.

This year, a few large transactions took place earlier in the year, including AXA PE’s acquisition of an $850 million portfolio from OMERS Private Equity. General Motors also had been in negotiations with China’s State Administration of Foreign Exchange sovereign wealth fund and Lexington Partners to sell about $2 billion in private equity holdings, according to various media reports. It’s unclear if that sale has closed.

Spectre of uncertainty

Uncertainty around the presidential election was one possible explanation for why market activity was slow; both sellers and buyers were waiting to see who would come out on top, which would give the market a sense of what tax policy could look like starting next year. Financial institutions may be holding off hitting the market until regulations affecting their ability to participate in the asset class are finalised, sources said.

“It’s possible some of the potential sellers could have waited a bit for the results of the election to see what could be the impact on their business,” said Benoit Verbrugghe, head of AXA PE’s New York office.

Continual uncertainty in the eurozone was likely another factor in keeping the market sluggish, sources said.

In the low interest rate environment, public pension systems that have sold off some of the biggest portfolios of the last few years may be holding off.

“That’s the calculation all sellers will make: if the motivation to sell is for strategic reasons or because of over-allocation, an investor will want to be confident the transaction is accretive from a return perspective,” said Nigel Dawn, managing director with UBS’ secondary advisory group.

While large transactions have slowed, activity is still strong at the smaller end of the market, sources said. Ultimately, total deal volume could reach $23 billion to $25 billion, putting it right in line with last year’s record breaking activity, according to a secondary market source.

All sources agreed that sellers putting off investment decisions because of uncertainty this year will likely come back to the market next year.

“We believe the markets will be quite active next year for big transactions,” Verbrugghe said.