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Debt fuels competition for fund stakes in H1

The use of debt is allowing buyers to remain competitive when bidding on large fund stakes, and this has driven up pricing, according to latest research by Setter Capital.

The use of leverage in secondaries transactions is growing as more buyers take advantage of debt to remain competitive in the high-priced environment.

A survey last week by Setter Capital showed that 43.9 percent of respondents to its mid-year survey believed the level of debt used by buyers has increased significantly in the first half of 2015, while more than 56 percent felt it was the same. No one felt it was less.

The increased use of leverage comes at a time when competition for deals has increased and some secondaries buyers need to find creative ways to maintain returns. The Setter survey also found that almost all buyers in the first half of the year felt competition for deals was at a similar level or higher than the same period the previous year.

With banks recovered from the global financial crisis and interest rates still low, banks are willing to take full advantage of opportunities to make money from lending to secondaries firms.

“Banks are back and there are a lot of them pushing in to this type of business activity,” Nico Taverna, head of secondaries at Adveq, said of loans provided to secondaries firms. “In the current low interest environment, banks need to find ways to deploy their money. As a bank it’s not easy to make a decent return in current low interest environment, and from the bank’s perspective it’s considered attractive to lend against private equity portfolios.”

In addition to buyers using more debt, the number of buyers using debt for the first time has also increased over the past two years due to the low cost of leverage, Taverna said.

Buyers find it easier to secure debt when looking to acquire large diversified portfolio stakes as opposed to single-line deals, as more diversified deals are inherently less risky, Taverna said. Adveq’s use of debt in secondaries transactions is ‘conservative’ as the firm mainly purchases single-line deals, he said.

Secondaries buyers typically use bank loans on a deal basis as well as revolving facilities at the fund level and deferred mechanisms in specific transactions.

Source: Setter Capital.