The best is yet to come

A quick look back at the stories Secondaries Investor has covered in 2016 and one thing’s clear: the market continues to innovate and evolve.

During a year punctuated by macroeconomic volatility and political uncertainty, the buyer and seller landscape has been evolving to deal with increasing competition, rising levels of leverage and high pricing, to name a few.

Deal volume for the first half fell to $12 billion, its lowest since 2013, according to advisory firm Greenhill Cogent. Estimates for full-year volume are between $30 billion and $35 billion. If accurate, this would mark the second year in a row of declining trades.

Yet headwinds such as public market volatility, Brexit and the US presidential election have failed to dampen secondaries players’ spirits. Nowhere is this more evident than in private equity, the largest asset class within the strategy, accounting for 82 percent of deal volume in the first half, according to advisory firm and placement agent Setter Capital.

One of the most captivating stories of the year was HarbourVest Partners’ hostile £1 billion ($1.2 billion; €1.2 billion) takeover bid for SVG Capital, a London-listed private equity vehicle. The deal dragged out over a nail-biting five weeks as competitors including Goldman Sachs and Canada Pension Plan Investment Board launched counter offers, and ended in mid-October when SVG capitulated to Boston-based HarbourVest’s offer to acquire the vehicle’s portfolio instead of the management company.

Market participants heralded the deal as a new era in the sector, with the head of European secondaries at one firm likening the deal to the “corporate raider” transactions of Wall Street.

Infrastructure secondaries have been making headlines, too, such as Arcus Infrastructure Partners’ €800 million tender offer on its 2007-vintage fund in March, and Ardian’s sale of its AXA Infrastructure Fund II, a 2007-vintage €1.1 billion vehicle.

Excluding real estate, real assets secondaries such as infrastructure, energy, timberland and agri, and metals and mining exploration, show real promise, with players such as HarbourVest logging around $11 billion in potential dealflow in 2015.

The buyer and seller landscape has been evolving across all asset classes, as a recent survey of limited partners globally by sister publication Private Equity International found. Almost a third of respondents said they plan to increase purchases of fund stakes over the next 12 months, a sign the already competitive secondaries market may become even more crowded.

Buyers have become sellers, such as Partners Group’s sale of an €800 million portfolio of tail-end private equity stakes to Goldman Sachs, and sellers have become buyers, such as Michigan Retirement System’s purchase of a $25 million stake in Warburg Pincus Private Equity XII.

“People always had these [buyer or seller] labels,” says Phil Tsai, global head of secondaries market advisory at UBS. “That has increasingly become more and more blurred.”

So how does all this compare with activity in real estate secondaries? For one thing, the buyer and seller labels there have yet to blur, and the buyer universe remains limited to a handful of dedicated players.

“Despite the relative attractiveness of the market, there still aren’t a lot of new entrants into the space,” says Sarah Schwarzschild, head of real estate secondaries at Metropolitan Real Estate. Pension funds and sovereign wealth funds have not built up dedicated real estate secondaries teams in the same way they have in private equity because real estate is still a specialised space, she adds.

As for complex deals such as fund restructurings, where assets are moved into new vehicles with reset economics and terms, at least five of these have closed this year, a sign players in the space are applying the same tools as their private equity counterparts, Schwarzschild says.

“The traditional [real estate] LP fund market is not going anywhere and will always exist,” she says. “These other types of asset secondaries deals, fund recaps, there’s a lot of buzz around them and they will continue to be prevalent.”

With firms including Partners Group and Landmark Partners back in market with dedicated real estate secondaries vehicles this year, new entrants to the space will do well to get ahead of the curve.