Credit Suisse: pricing hit record high in 2017

Buyout stakes trading at 10% premiums to NAV last year were 'not uncommon'.

Strong equity markets and an expanding buyer universe pushed secondaries pricing to a record high last year, making par to net asset value “the new discount”, according to Credit Suisse.

The average price of private equity interests sold was 96 percent of NAV during the 12 months to December, according to the investment bank’s Secondary Market Update. Some high-quality buyout funds traded at a 10 percent premium to NAV.

“In our view, two key factors in the secondary market that would have a meaningful impact on volumes or prices would be a meaningful drop in secondary fundraising or a meaningful pull back in appetite of banks to lend to secondary buyers, but there is no sign of either at the moment,” Jonathan Abecassis, co-head of secondary advisory in Credit Suisse’s private fund group, told Secondaries Investor.

While strong public equity markets have historically spurred high pricing for good assets, pricing has peaked across the market, suggesting internal secondaries market factors are pushing prices up, the report noted. The $110 billion of dry powder and an expanding universe of non-traditional buyers are among the main drivers, the report concluded.

Leverage was also a significant factor in pricing last year, according to the report.  In a survey of buyers, 36 percent of respondents said they use total leverage equivalent to 50 percent to 60 percent of transaction value, with a further 36 percent using 40 percent to 60 percent. The report defines total transaction leverage as fund level credit facilities plus deferrals.

“Contributing to this backdrop, the cadence of debt paydown has been so rapid during the last two years that lenders are encouraging investors to borrow at even higher LTV ratios,” suggesting the role of leverage is likely to grow, the report noted.

The report also noted:

  • Total deal volume hit a record high of around $48 billion, up from $33 billion in 2016.
  • Europe deal volume surpassed North America for the first time, accounting for 41 percent of volume versus 35 percent.
  • Funds of funds and secondaries funds accounted for 15 percent of volume.
  • GP-led deal volume hit $16 billion.
  • Some of the most active buyers are underwriting LP portfolios to returns between 9 percent and 13 percent; GP-led deals are being underwritten at 400 basis points higher than LP portfolios.