For some time now, two necessary conditions for major private equity secondaries activity have been in place: significant investment capital, and motivated sellers.
But the long-anticipated “wave” never quite reached critical mass, in part because the motivated sellers weren't motivated enough. It turns out that institutions looking to unload private equity partnership interests were not as desperate as some hoped, and the bids for their assets were ultimately too far away from the asks.
Sure, there have been many discrete transactions agreed on the secondaries market – and a few sizable ones, too – but not enough to justify the amount of capital earmarked for these deals, and certainly not enough to justify the enthusiastic forecasts of some secondaries market boosters.
This deal activity comes amid news that discounts to NAV for major private equity fund interests have largely evaporated. This does not necessarily mean that the performances of these funds (Blackstone, TPG, et al) have suddenly leapt back over their carry hurdles, but rather that the marks applied to portfolio companies by the GPs now more closely match the outlook of external bidders.
There are, of course, myriad factors contributing to what feels like gathering market momentum. For example, the number of motivated sellers is likely increasing as institutions ready for pending regulatory changes including the US' Volcker rule or the EU's Solvency II directive.
There's also clearly something to be said for the amount of dry powder sloshing around the secondaries market. The fact that the secondary buyers are starting to spend more aggressively says something powerful about how they view the asset class: that the future will be better than the present, and the price of buying into that bright future is suddenly fair. It's a powerful mix of optimism and consensus.
However, this is the secondaries market we're talking about, and nothing is ever straightforward. Just as 'traditional' secondary deals are heating up, so too are new options for investors looking to actively manage and rebalance portfolios. In London, as PEO revealed Monday, some institutional investors – and indeed some secondary funds – are wading into a new derivatives platform to mitigate risk. If this catches on and the copy cats turn up, then the secondaries market could become even more complex and unpredictable than ever before.
PS – Private Equity International wades deeper into the evolving secondaries market with a special feature in its September issue. Stay tuned.