A buyer’s or seller’s market?

There are huge attractions to being a seller on the secondaries market in 2016, while attractive deals can also be found as a buyer. Chason Beggerow, a partner on Altius Associates' investment committee, explains why objectives and expectations need to be taken into account when deciding which side to sit on.

Chason Beggerow

Secondaries transaction volume for the year 2015 is projected to be in the $30-$35 billion range. While this is slightly below 2014’s record level of approximately $35-$37 billion, it still represents the second best year of transaction volume to date and reflects the continued growth and development of the secondaries market.

Secondaries brokers are saying it is a very good time for investors to be selling into the market – prices are strong and there is considerable dry powder.

On the other hand, when Altius speaks to secondaries fund managers they say, while the market is competitive, they continue to find attractive buying opportunities to fill their pipelines and deploy capital.

Adding to the confusion, many secondaries fund managers are investing their current fund while selling prior fund holdings at the same time.  Similarly, Altius is aware of a number of investors that are simultaneously sellers of holdings in their portfolio and investors (through funds or direct) in the secondaries market.

So, is now a good time to be a buyer or a seller?

The case for being a seller

The case for being a seller centres largely on pricing and portfolio management. The increased activity in the secondaries market and its growing liquidity has enabled more efficient pricing. These characteristics make secondaries a viable and accepted portfolio management tool that more investors are using to reduce the number of managers, exit undesirable sectors or geographies or simply rebalance their portfolios.

It is difficult to aggregate good industry data on secondaries pricing as there are numerous factors at play. For example: individual stake versus portfolio transactions; quality of underlying assets; and seller motive (highest price, liquidity or other needs, record date of bids).

The consensus is that pricing is strong for sellers as there is a considerable amount of buyer interest in secondaries opportunities, particularly for high-quality assets.

One of the factors driving pricing is the amount of dry powder available. The demand from investors for private equity secondaries is robust and is expected to remain so, at least in the near term.

Leverage is also providing upward pressure on pricing as it is increasingly used by secondaries buyers. According to Greenhill Cogent, approximately 25 percent of buyers in 2014 used third-party financing at fund or deal level.

In addition to pricing (or perhaps as a result of strong pricing), the growing use of secondaries as a portfolio management tool is driving many investors to consider selling. Portfolio management may include a desire to reduce the number of manager relationships or perhaps rebalance a portfolio towards a different strategy, geography or philosophy.

The case for being a buyer

There has been considerable capital raised by secondaries fund managers over the past few years. This represents a clear interest by institutional investors to participate as “buyers”. There are three key reasons for this: the conventional rationale for investing in secondaries; the large, diverse and growing opportunity set; and the rise of “non-traditional” dealflow.

The conventional rationale for investing in secondaries is well known and include investing in known portfolios (rather than blind pools), reduced or eliminated J-curve effect, quicker return of capital, and shorter hold periods.

The large, diverse and growing opportunity set comes from the signifiant rebound in primary capital in 2011-2014, when $1.3 trillion was raised. As a result, a strong baseline of potential opportunity for the secondaries market exists

The secondaries industry has been quite adept in continuous evolution and searching out new and less-efficient areas of the market. This has caused market segmentation between “traditional” dealflow (purchasing investor fund interests) and more complex, solution-oriented transactions. These “non-traditional” transactions include deals such as fund manager restructurings, fund manager-led tender offers, team spinouts, direct secondaries, as well as large and complicated transactions that require much more of a “solution” (structuring, tax, reporting and so on) approach.

So the answer to whether it’s better to be a buyer or a seller is that it depends on an investor’s objectives and expectations.

This isn’t an effort to avoid the question, but the current volume of the market is a result of buyers and sellers finding middle ground and being able to satisfy their respective goals. Altius believes that the growth in transaction value over the past two years is a result of a type of equilibrium between buyers and sellers, which have both been able to use the secondaries market to achieve their respective objectives.

Chason Beggerow is a partner on Altius Associates’ global investment team. Based in the advisory and management firm’s Richmond, Virginia office, Beggerow has over 21 years of private markets experience and is responsible for directing Altius’ secondaries and co-investment practice.