Competition intensifies at lower end of market

Competition has become more acute in the secondaries market, particularly at the lower end, which is pushing investors to find new ways to maintain returns, according to Sunaina Sinha, founder and managing partner at Cebile Capital.

“There have been so many new entrants in the market in the last three or five years with funds between $100 million and $500 million,” Sinha told Secondaries Investor. “They are all competing for deals.”

Secondaries funds typically return anywhere from 15 percent to 20 percent, while for the best vintages, returns have been between 20 percent and 25 percent. “Secondaries fund returns haven’t fallen yet,” Sinha said.

To stay competitive, large secondaries firms have been focusing on very large deals, but for smaller firms participating in auctions, there’s simply too much competition. As a result, they have become more active in direct secondaries –purchasing portfolios of companies – and in restructurings.

“They’re not the majority of the deals but we’re seeing more of those because there’s more competition in auctions.” Sinha said. “That’s where many secondaries GPs are finding their edge.”

Smaller firms are also maintaining returns by using the different kinds of leverage at their disposal, including deferral structures and private loans. Buyers who use leverage are winning smaller deals, while those who can’t use leverage simply can’t compete.

So far, market participants have been careful in their use of debt, but Sinha thinks some defaults are inevitable.

“We haven’t seen many defaults in the secondaries market yet when leverage has been employed,” she said. “These deals are being done with prudence, but there will be some defaults in the next few years.”