Expect fundraising to look slower this year

The record amount of capital hauled in for private equity secondaries in 2017 is unlikely to be repeated in 2018.

We’ve been totting up the numbers and the results are in: 2017 was the biggest-ever year for private equity secondaries fundraising.

Twenty-six funds hit final close on a combined total of $38.3 billion, outstripping the amount raised in previous high-point 2016 by a little over $5 billion. The mean size of a secondaries fund to hold a final close last year also hit a record $1.47 billion, above the previous year’s figure of $1.38 billion and the 2015 average of $1.12 billion.

Some familiar names sit at the top of the league table. The largest fundraise was by Strategic Partners, which in January collected $7.5 billion for its Fund VII, followed by Goldman Sachs Asset Management, which is understood to have held a $7.1 billion final close in July on its Vintage VII fund. NB Alternatives, Lexington Partners and AlpInvest are also represented in the top five with funds ranging in size from $2.5 billion to $6.5 billion.

Ardian, Coller Capital and Lexington Partners are all expected to return to market in 2018, and with LPs such as California Public Employees’ Retirement System expressing the desire to increase their exposure to the asset class, it will be a fascinating beauty contest between the three firms.

“Four years ago a lot of LPs were saying, why should I add a lower IRR, lower multiple quasi-fund of funds to my portfolio?” says Sunaina Sinha, managing partner of secondaries advisor Cebile Capital. “Today they see a shorter lifecycle, healthy return levels – lower or equivalent to other private equity strategies but with more diversification – and higher realisation rates. That has been proven cycle in, cycle out.”

While the long-term fundamentals are strong, headline fundraising figures for PE secondaries are likely to show something of a lull in 2018. The big three of Ardian, Coller and Lexington won’t see the fruits of their fundraising labour until late 2019 at the earliest. Two of the three largest secondaries funds in market going into 2018 are real estate, rather than private equity, and there are no funds in market targeting more than Landmark Partners’ $4 billion, PEI data show.

There is also some evidence that secondaries funds may be becoming victims of their own success. September’s H2 Liquidity Index, compiled by advisor and placement agent Rede Partners, found that high pricing, driven in no small part by the huge amounts of money raised, is dampening limited partners’ enthusiasm towards the asset class.

Placement agent Probitas Partners, in its December Private Equity Institutional Investor Trends for 2018 report, found that 26 percent of LPs which responded “are not active in secondaries in any manner”, up from 17 percent the year before. Managing director Kelly DePonte said at the time that buoyant fundraising numbers were being drive more by the supply of brand-name product in the market at the same time, than a widespread demand for secondaries exposure.

“Fundraising for secondaries is up again [for 2017] but that has really been driven by three well-regarded, long-lived managers that a number of investors see as core holdings,” he told Secondaries Investor. “I’m not sure interest [last year] was truly widespread, and on the basis of this survey it won’t be widespread in 2018.”

For those keeping an eye on annual figures, 2018 may look like a quiet year before the big names start to show their hands in 2019.

Has secondaries fundraising reached a peak? Tell us what you think: rod.j@peimedia.com or @RodJamesPE