There has been no shortage of interesting secondaries transactions in Europe this year, with staple deals, complex restructurings and portfolio sales making headlines almost every week.
Here are five predictions from European market participants on what is in store for the secondaries market next year.
1. Tail-end sales will drive dealflow
Pre-crisis vintage funds will come to the end of their lives and general partners will take advantage of strong pricing to try to dispose of these assets, according to Nico Taverna, head of secondaries at Adveq in Zurich.
“In 2014 and 2015, people who held certain funds of funds reaching the end of their fund lives liquidated the vehicles rather than wait another one to two years,” Taverna said, referring to how a large portion of secondaries sales this year and last were made up of tail-end funds. But he also warned that “if there was a market correction, then I think it would become more difficult to liquidate these vehicles”.
2. Complex deals will hit the lower end of the market
Investors at the lower end of the market will also look for more complex transactions with higher returns as plain-vanilla secondaries become more expensive.
“Two or three years ago you still found €5 million or €10 million European small to mid-market pieces in the secondary space at decent discounts. Today, they’re hardly available anymore,” says Christian Böhler, the principal in charge of secondaries at Swiss firm Akina. As simple deals become more scarce, Böhler said buyers will be pushed to do more complex deals such as GP-led restructurings at the lower end of the market.
3. Large institutional investors will build up in-house secondaries teams
This may not be across the board as starting an in-house secondaries team can be challenging for some resource-constraint limited partners, but Taverna believes there will be more LPs following that trajectory.
“They’ve already started to,” he said. “Originally you only had dedicated secondaries players in the secondaries market and then very big institutional investors started to invest in the secondaries market on a more opportunistic basis. Those investors are clearly here to stay.”
4. Direct secondaries deals will increase
Fund liquidations will allow investors to purchase stakes directly in portfolio companies, something that is already on the rise, according to a partner at a Paris-based fund of funds.
“We’re seeing a lot of these deals in the market and a lot of them closing,” the partner said. “Direct secondaries are growing significantly. Many funds that historically were doing almost exclusively LP stakes are going to be doing a lot more direct secondaries, and some of these through fund liquidations.”
5. Niche strategies will continue
This year saw the entrance of new niche North American players to the scene, such as Whitehorse Liquidity Partners, led by the former head of secondaries at the Canada Pension Plan Investment Board (CPPIB), Yann Robard, and Kline Hill Partners, the new firm headed by Mike Bego, a former partner at Willowridge Partners. Taverna thinks that phenomenon, which was more evident in the US, will make its way to Europe as well in 2016.
“As the market becomes more efficient, people try to find more niches where they can exploit further market inefficiencies,” he said.