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Buyer beware: it’s a seller’s market

High asset pricing in secondaries has created a seller's market. Novice buyers must be aware of the due diligence required.

Sellers and their brokers are using high NAVs from December and March to ‘lock in’ prices that tempt sellers to the market, according to a source from a secondaries fund of funds I talked to while out and about in London this week.

December NAVs have been available for a while, of course, and now the March valuations are starting to trickle through as well. NAVs have kept on climbing, and many are keen to buy. It’s a seller’s market.

The result has been a flurry of activity in adviser-led disposals from ‘non-traditional’ sellers, ramping up dealflow in recent weeks. Investors normally known for buying secondaries are keen to take advantage of the current conditions and sell high.

For example, the Wellcome Trust is reportedly shopping $750 million of venture stakes to take advantage of the good pricing. I also hear that Australian firm QIC is bringing a $1 billion portfolio to the market for the same reason. Last week I wrote about Lexington offering a genuinely full price to persuade JPMorgan to consummate a deal for their One Equity Partners holding.

For buyers, as ever when markets are buoyant, the order of the day is to tread carefully.  A chief investment officer for a major US pension LP told me that most secondaries deals bundle good funds with less-well-performing funds to get them moved on the secondaries market. Put more prosaically by another advisor I talked to: 25 percent is gold, 75 percent is not.

The dedicated secondaries houses field large teams of due diligence specialists to help them separate the wheat from the chaff. For the more opportunistic type of buyer, competing with the likes of Ardian, Coller, Goldman etc and getting their pricing right for bundled deals is not easy, partly because they typically don’t have the resources to do the due diligence.

Cutting corners will almost certainly be costly, because with pricing this high, the margin for error is minimal. Buyers beware: it’s the sort of climate where bad mistakes get made.