Triago: Direct secondaries increasingly prominent

While overall secondary activity is down, growing pressure to restructure poorly-performing portfolios dating from the boom years has resulted in direct secondaries doubling their share of the market since last year, according to fresh research.

Direct secondary activity, where investors sell assets en masse, has become a more significant part of the secondaries market and is set to grow further, according to fresh research. 

The market share of direct secondaries rose to 12 percent this year, up from 6 percent in 2012, according to research from private equity advisory firm Triago. This figure is likely to climb further and by 2016 or 2017 may account for a quarter of all secondaries activity, the report concluded.  

The peak is expected because “pressure to restructure poorly performing portfolios of record size, dating back from the credit bubble’s plentiful fundraising years of 2005 to 2008, should be at its maximum then,” Triago said. 

However, to make these direct secondary deals attractive to potential sellers, buyers will have to aggressively offer deferred payments, rollover and other options offering greater upside, the firm added. Triago expects discounts to net asset value on these deals to be 20 percent or more.

Increased LP liquidity, which has been driven by rising distributions, and a record $63 billion in committed but unspent capital held by secondary funds and the secondary pockets of fund-of-funds, has given secondary market sellers more power. “It’s a seller’s market,” Mathieu Drean, global head of secondaries at Triago, told Private Equity International. 

The average discount to net asset value is approximately 7 percent, compared to 9 percent at the end of 2012. Discounts are set to narrow further this year, Drean believes. 

Although direct secondaries are on the rise, annual secondary market volume is likely to decrease to $20 billion or less this year, a 23 percent drop from last year. However, as secondary funds become more eager to spend their dry powder, this dynamic is expected to change, with buyers willing to pay closer to par, according to Triago. 

The report also looked at the exit climate, with total global divestments reaching almost $100 billion. Exits and dividend recapitalisations accounted for six percent of committed capital, while calls to finance new deals were four percent of committed capital. 

However, GPs invested less capital than expected, Triago said. “With an estimated $145 billion in unspent private equity commitments set for rolling 12-month expiry this year, many industry observers thought GPs would have invested more of that record bulge by now,” Triago said. The firm expects approximately $20 billion to expire this year without being invested, which will add significantly to investor cash. 

Look out for PEI’s September issue, in which we will take an in depth look at the latest developments in the secondary market.