Greenhill: H1 pricing drops to eight-year low

Buyers being cautious of imminent write-downs in H1 fuelled the lowest pricing since 2012, according to the advisor's latest mid-year report.

Pricing in the secondaries market dropped to its lowest level since 2012 as buyers applied material discounts to account for market uncertainty amid the coronavirus pandemic.

Average prices for private markets funds stakes in the first half of the year fell by 9 percentage points to 80 percent of net asset value, compared with the same period last year, according to investment bank Greenhill‘s latest half-year report. The drop is an 8 percentage-point decline on average pricing for full-year 2019.

“With most transactions in 1H pricing off of a Q3 2019 record date, buyers were highly cautious of imminent write-downs at the end of Q1,” Greenhill noted. “Large risk premiums, vis-à-vis larger discounts to NAV, were required from buyers who did submit bids.”

The average price of a buyout fund dropped from 93 percent of net asset value to 85 percent. Real estate had the steepest decline, from 83 percent of NAV to 72 percent.

Sales were mainly opportunistic in nature, with government intervention helping avert a need for liquidity on the part of limited partners, managing director Bernhard Engelien told Secondaries Investor. This general lack of distress also helps explain why preferred equity accounted for around 15 percent of the market.

Overall transaction volume was estimated at around $18 billion in the first half, a decline of 57 percent on the same period of 2019.

GP-led deals accounted for around 33 percent of the total, or $5.94 billion, 57 percent down on the first half of last year.

First-half volumes were not as bad as feared given the drop-off in activity during March and April, Engelien said. A strong recovery in second-quarter valuations also bodes well for activity during the remainder of 2020.

Seller universe shrinks

Five transactions accounted for 40 percent of deal volume in the first half, four of which were sales of limited partnership stakes, Greenhill noted. Pensions, sovereign wealth funds and general partners accounted for 76 percent of volumes with financial institutions, with funds of funds and endowments largely staying away from the market.

Alaska Permanent Fund, Future Fund and Canada Pension Plan Investment Board were among those to sell large portfolios in the first half, Secondaries Investor reported.

Newer vintages dominate 

There was a rush to newer vintages in the first half as buyers sought funds with large unfunded components. Funds of vintage 2013 or later accounted for 81 percent of transacted volume, compared with 51 percent in all of 2019. Pre-2009 vintage funds accounted for 10 percent of transacted volumes, versus 28 percent in full-year 2019.

The average fund that changed hands was 2014-vintage and 70 percent called, Greenhill found.

Capital overhang widens

Reduced deal volume and bumper secondaries fundraising caused capital overhang to grow in the first half, Greenhill noted. There is 2.9x more near-term capital available to invest in the secondaries market than deal volume over the last 12 months. The advisor puts the volume of near-term available capital at $183 billion, including $37 billion of available leverage.

Engelien expects the overhang to reduce as prices stabilise and buyers who are keen to deploy capital begin to return to market in the second half of the year.

Second-half upturn predicted

Greenhill estimates there will be between $20 billion and $30 billion of secondaries transaction volume in the second half, as sellers are tempted back into market by the recovery in June NAVs and as buyers try to make up for time lost in the first half. This should in turn help drive prices back up to 2019 levels, barring a market shock, it noted.