Secondaries dry power reaches $50bn

The private equity secondaries market is becoming both increasingly competitive and institutionalised, according to a report by specialist private equity broker Cattegatt.

An number of new market entrants with lower return targets, such as pension funds, insurance companies and family offices, are creating a competitive buy-side environment in which $50 billion of dry power is currently in search of secondaries assets. This increased competition, further enhanced by the use of leveraging and innovative deal structures, is resulting in vendors obtaining better prices, according to the report.

For sellers, prices are attractive  for interests in ‘big name’ funds and smaller vehicles, and across a wide spectrum of strategies including infrastructure, real estate and venture capital.

Deal flow in the US is largely being caused by portfolio rebalancing, as limited partners consolidate their exposure with preferred general partners. In Europe, regulatory changes are driving large basket disposals, while there is increased activity across Asia.

The market also appeared to be becoming more institutionalised. Of the LPs surveyed, roughly half said that they were likely to use the private equity secondaries market over the next three to five years in order to optimise their books. Two years ago, only around a quarter said that this was the case.

Looking forwards, Cattegatt founder Lars Lindqvist told Secondaries Investor that he had little doubt that prices would continue to rise, at least in the short term, due to the unprecedented number of investors chasing secondaries assets, and the huge amount of dry powder they have to deploy.

“I hope that when the period of portfolio rebalancing due to regulatory requirements is over, market participants will have learned a lot. And they will have gained a lot of experience in the secondaries market,” Lindqvist said. “They will have seen how they can effectively use the secondaries market, and will therefore continue to actively use it as a normal part of portfolio management.”

According to a recent report from Cogent Partners, full-year secondaries market volume is on track to increase by 10 percent from 2013′s levels. Total volume was $27.5 billion last year. Volume is expected to continue to gain pace in the second half of the year and exceed the $30 billion mark for the first time in history.