Study: LP secondaries 'key driver' of dealflow

The secondaries market globally is ramping up as large amounts of dry powder strain dealflow, according to an SEI survey.

The number of LPs active in the secondaries market has increased over the past few years, according to a recent study by SEI, surveying 654 institutional investors, fund managers and consultants in private equity. 

More than six out of 10 limited partner respondents said they have bought or sold interests or direct holdings in the secondaries market, compared to just three out of 10 that said the same in 2009, the findings showed. 

“Institutional investors are relatively open-minded when it comes to the types of private equity investments included in their portfolios. The average investor uses four broad strategies, with leveraged buyouts, used by almost four in five investors, representing the most common type of investment,” the report said. 

It added that two-thirds of respondents replied that secondary buyouts will be a “key driver of dealflow” during 2013.

An uptick in secondaries is also reflective of the strained investment environment that has been prolonged by a $1 trillion overhang of dry powder globally, according to the report. 

Two-thirds of respondents replied that secondary buyouts will be a “key driver of dealflow” during 2013.

SEI Study

Finding quality investment opportunities was named the industry’s “greatest challenge”, far outstripping concerns over new regulations or tax increases. 

The amount of dry powder is also driving up valuations, with more than 60 percent of respondents believing that the cash surplus is creating more competitive bidding situations and more than 45 percent saying it is raising sellers’ price expectations. 

SEI identified the secondaries market as a way for GPs to mitigate the difficult investment environment, but also suggested adopting more flexible fee structures and leveraging technology and operational relationships to become more competitive. 

Despite the challenges, investors intend to keep or increase their allocations to private equity. About 55 percent said there would be no change to their allocations, while 36 percent said they plan to increase the amount they commit to the asset class. 

“Proceeds from existing private equity holdings are another common source of capital, but without exits, reinvestments are scarce. Almost a third of investors say they plan to fund higher allocations at least in part with new cash flow,” the report noted.