Credit Suisse: pricing hits second-highest level on record – exclusive

Fund stakes traded at the second highest level ever recorded during the second quarter as equity market volatility drove investors to focus on higher quality assets, according to a report by Credit Suisse obtained exclusively by Secondaries Investor.

Median pricing for private equity fund interests was 95 percent of net asset value, the highest quarterly level since Q3 2014, according to the bank’s Secondary Market Update July 2016.

“The bifurcation between higher-quality and lower-quality funds and managers continues to be amplified in today’s mature secondaries market,” the report noted. “Equity market volatility has exacerbated this trend: investors are ever more selective and focusing on higher-quality funds, which continue to enjoy robust support, while others struggle.”

Britain’s decision to leave the EU is unlikely to affect pricing for high quality assets in the second half, the report also noted. Assets perceived to be of lower quality or where they generate most of their revenue in sterling may experience slight pricing adjustments.

While secondaries participants are taking a “business as usual” stance post-Brexit, investment committees are increasingly concerned about political risk and currency volatility, and European limited partners holding dollar assets may sell holdings in order to lock in more attractive returns from recent currency volatility.

The bank also expects US investors will continue to rebalance their exposure to European assets in the medium term.

Real estate secondaries is one sector Credit Suisse expects to grow significantly in the future, with GP-led deals in the space a growing theme, the report noted. The nature of real estate assets being evergreen means the asset class offers a stable long-term yield, making them suitable for secondaries deals.

In particular, the bank expects real estate secondaries transactions will become even more complex, with with single-asset spin-outs, asset/portfolio-specific preferred equity structures and alternate vehicle structures increasingly used in deals.

Credit Suisse estimates $14.9 billion in private equity, real estate and infrastructure secondaries traded during the first half. The figure is higher than Greenhill Cogent’s $12 billion estimate and lower than NYPPEX Private Markets’ $15.7 billion.

The Zurich-headquartered bank estimates there is $105 billion in dry powder – which assumes a four-year investment period for closed funds and includes funds in market and 20 percent leverage – and this may lead to increased deal volume in the second half.

Despite this, Credit Suisse’s estimate is for as much as a 20 percent drop in deal volume year on year, with between $30 billion to $35 billion.

“This is a natural pause for breath after several record years on the trot, and should support continued strong pricing, given the amount of capital available to invest,” Jonathan Abecassis, a director in Credit Suisse’s private fund group, told Secondaries Investor. This in turn supports future dealflow and represents a natural cycle in a healthy and maturing market, he said.

Source: Credit Suisse.