The secondaries market may have entered a new phase and buyers need to adapt, according to Adams Street Partners‘ head of secondaries.
Speaking to Secondaries Investor, Jeff Akers said buyers have become used to being rewarded for taking risks, a state of affairs that has changed with the economic downturn.
“Investors are going to have to figure out what’s good risk, what’s bad risk and what works across market cycles,” Akers said. “We just happened to have been in this bull market. It was not going to last forever.”
Buyers should think carefully about their leverage use and the concentration risk they take on, he added. Strategies such as buying lower-quality assets, with the intention of booking an early gain and selling them on, are also less effective in an environment characterised by risk-aversion among buyers.
The spread between high and low auction bids has widened considerably this year, suggesting that buyers have very different views on the value of portfolio companies, Akers said. This makes intimate knowledge of the assets more important than ever.
“Some bids are going in really low because they don’t have insight about [positive] things going on in the portfolio and some are going in really high because they don’t know about the challenges,” he said. “For assets we know really well, sometimes we lose by 20 [basis] points, sometimes we are the top bidder.”
Chicago-headquartered Adams Street is investing its $2 billion sixth secondaries programme, which closed in June 2019, according to Secondaries Investor data.