The amount of capital raised for secondaries hit a record high last year despite early macroeconomic headwinds and political uncertainty.
Fundraising for dedicated secondaries vehicles across private equity, real estate and infrastructure rose to $33.9 billion last year from $23.5 billion in 2015, an increase of more than 44 percent, according to PEI data. The figure does not include capital raised for other strategies that may invest in secondaries, such as funds of funds.
The largest funds that held a final close last year include Ardian’s ASF VII vehicle which included $10.8 billion for secondaries, and HarbourVest Partners’ Dover Street IX, which raise $4.8 billion.
The average size of funds is also rising as fewer vehicles raise more capital, according to the data. Secondaries funds have almost quadrupled in size over the last eight years, with 23 vehicles closing on an average of $1.5 billion last year, compared with 22 vehicles closing on an average $376 million in 2008, according to PEI data.
With high levels of dry powder – as much as $105 billion, according to advisory firm Lazard’s estimate – competition for deals has increased, and this will lead to lower returns on transactions, according to a partner at a New York secondaries firm. Ten years ago, buyers were underwriting diversified multi-million dollar portfolios at around a 20 percent unlevered return the partner said. This has dropped to around 10 percent today, he added.
“For private equity in general, if you talk to any LP they certainly expect returns to come down,” he said. “Secondaries are certainly not immune to that.”
Source: PEI data.