Elevated pricing mutes returns, says Verus

Increased pricing and transaction volume may be impacting returns at secondaries firms, meaning asset management and advisory firm Verus sees the secondaries market over the next 12 to 18 months as an unattractive strategy within private equity, according to its Private Equity Outlook report, which was released last month.

“Pricing has increased in recent years,” Verus, based in Seattle and formerly known as Wurts & Associates, wrote in the report. “Buyers anecdotally suggest stressed selling has given way to healthy limited partners reallocating capital through culling manager, strategy and regional exposure, which may sustain increased prices.”

Greenhill Cogent, in its Secondary Market Trends & Outlook released last week, found that the average high bid for buyout funds in the first half of the year was 95 percent of net asset value (NAV).

Verus noted that elevated secondary pricing mutes potential returns, but “a general increase in primary private equity investments at high valuations, followed by a market correction, may provide a favorable future entry point.”

If a correction does not occur, managers will continue to look toward complex transactions such as restructuring of “zombie funds” and team spinouts to drive deal flow and competitive pricing.

Verus also noted that for secondaries buyers who purchased at or around par, some maturing limited partners interests may still provide the J-curve mitigation typically associated with discounted secondaries.

Other private equity strategies Verus finds unattractive over the next 12 to 18 months include US large buyouts and growth and late-stage venture capital. Some of the strategies it finds attractive include US mid-market buyouts as well as US and European direct lending.