Buyers pessimistic about returns and valuations – survey

Expected returns for secondaries deals completed in the first half are down compared with a year earlier, according to a report by Setter Capital.

Buyer pessimism increased in the first half of the year with respondents to a survey by advisory firm Setter Capital saying they expect deal multiples and net asset values to drop.

Estimated returns for secondaries deals completed in the first half were forecast to fall, with respondents to the Toronto-based firm’s Volume Report H1 2016 forecasting average gross multiples of 1.39x, down from the 1.43x expected a year earlier.

“People feel the exit environment is not as rosy as it was a year ago,” Zia Rahman, an associate at Setter, told Secondaries Investor.

The firm based its data on responses from 83 of the 119 most active and regular buyers in the secondaries market.

Buyers also expected an average drop for NAVs of 4 percent in the second half and that the pace of distributions will be flat. The forecasts are less optimistic than last year when buyers expected distributions to rise by 0.38 percent and NAV valuations to rise by 1.65 percent, the report noted.

Setter‘s survey found that deal volume in the first half fell almost 10 percent year-on-year to $18.6 billion, the lowest estimated drop among advisory firms’ mid-year reports.

Real estate fund stake and direct secondaries deal volume fell almost 37 percent to $1.8 billion, the biggest decrease among all strategies, the report noted.

Only infrastructure and venture capital experienced increases in deal volume, up 40 percent to $860 million and 55 percent to $1.2 billion respectively.

Full year transaction volume is expected to drop to $39.7 billion, a 20 percent decrease from $49.6 billion in 2015, the survey found. Buyers and sellers are less able to agree on pricing due to volatility in public markets, Rahman said.

“There are so many opportunistic buyers and sellers out there but when the markets don’t have a clear direction, it’s hard for the two sides to agree,” Rahman said.