Dry powder to hit $120bn amid declining asset quality

Undeployed capital for secondaries is estimated to grow by a third this year while asset quality and returns decline, two market reports show.

Evercore, which surveyed more than 70 investors including traditional buyers, pension plans and sovereign wealth funds, estimates dry powder will hit $120 billion in 2017, up on $90 billion last year, according to its 2016 Secondary Market Survey Results.

The firm estimates deal volume fell 12 percent to $37 billion last year compared with $42 billion in 2015  The figure, which covers private equity, real estate and infrastructure, matches Greenhill Cogent’s estimate. Credit Suisse estimated $31 billion while Setter Capital put the figure at $42.2 billion.

The growing capital availability comes as asset quality becomes poorer, according to the report and research by global investment firm Partners Group.

In its H1 2017 Private Markets Navigator, Partners said there has been a “general decrease in the quality of assets available” in the secondaries market. In Evercore’s study, 37 percent of respondents said asset quality had declined from the previous year, while a mere 4 percent said it had increased.

Decreasing asset quality is hitting return expectations, with 60 percent of buyers surveyed by Evercore saying return targets have decreased for limited partnership portfolios, concentrated LP positions and direct portfolios over the past three years. Partners’ report also notes return expectations across the asset class have decreased in recent years.

Source: Evercore.