Secondaries deal volume has hit another record high, surpassing the $70 billion mark according to estimates from advisory and intermediary firms.
Evercore and Setter Capital published their full-year surveys on Thursday. Here are five key takeaways.
There was a shift towards the higher end of return expectations for good quality single buyout positions between the 1.3x to 1.7x bracket, according to Evercore’s YE 2018 Secondary Market report. There was no change for expectations of between 1.7x to 1.9x, while expectations for returns greater than 1.9x fell to 2 percent of respondents from 8 percent.
Buyers who employed vehicle-level leverage did so at an average loan-to-value level of greater than 40 percent, according to Evercore.
“The secondaries industry is evolving fast and competition is putting pressure on returns, which means firms are having to become more sophisticated to maintain performance,” said Ian Wiese, a fund finance director at Investec. “This means more complex deals but also more savvy use of debt.”
The average respondent to Setter’s Volume Report FY 2018 survey expected valuations of portfolio net asset value to increase by 0.3 percent this year. It is less than the 1.15 percent registered in last year’s survey.
The respondents expect distributions to decrease by 1.2 percent this year. Last year, they expected a 1.2 percent rise.
“For the most part, buyers do not expect any material shift in pricing,” Evercore noted. Still, macro developments were cited by the largest number of respondents (47 percent) as the biggest expected driver of pricing movements.
“An economic downturn in 2019 or beyond may actually be positive for the volume of GP-led fund restructuring transactions,” said Neil Harper, chief investment officer at Morgan Stanley AIP. “Strategic buyers for mature portfolio companies may hold back, valuations may moderate and LPs in older vintage year funds may have a more pressing need for liquidity.”
Funds of funds were also active as buyers, accounting for 8.6 percent ($6.8 billion) of total secondaries purchases last year. Secondaries funds accounted for 84 percent, pension funds for 6 percent.
Evercore’s survey is based on the opinions of more than 60 investors including non-traditional investors such as pension plans and sovereign wealth funds. Setter’s survey is based on responses from 121 buyers of secondaries positions. It does not include the activity of many non-traditional buyers, such as sovereign wealth funds.
– Adam Le contributed to this story.