“Barring a major economic shock, expect the secondaries market to transact record volumes in 2018,” says Francois Aguerre, a partner with Coller Capital. It’s a sentiment shared by many of the sources Secondaries Investor asked about what was in store.
Secondaries firms may move into primaries
Diversification and specialisation will continue. Firms may raise primary or co-investment vehicles, while captive teams will spin out amid a rise in first-time fundraises, according to Shawn Schestag, leader of the secondaries advisory unit at Sixpoint Partners in New York. Firms may even structure fundraises with preferred and common LP commitments, he adds.
A wider range of geographies
Deals in far-flung places like Peru and Russia emerged in 2017. Transactions outside North America and Western Europe are likely to increase by 3 to 5 percentage points of total volume next year, according to Philip Tsai, global head of secondaries market advisory at UBS in New York.
Volume is strong in the more established markets, but buyers are always looking to push the envelope by finding new areas to invest in with less competition, Tsai adds.
Returns will start to diverge
Secondaries funds have historically delivered returns within a narrow range, with LPs even complaining that they struggle to tell funds apart. This is likely to change in the next year as buyers’ strategies begin to diversify, according to Matt Jones, a London-based partner in Pantheon’s global secondaries team.
“You now have people who are focused on large diversified deals, and they may or may not apply leverage to those. Then you have people just focusing on tail-end positions, or GP restructurings, or small positions,” Jones says. “We’re seeing some players making more concentrated bets in these deals, and some will work out and some will not work out.”
GP interest transactions may become dealflow
Funds of firms may be able to find exits for their investments via the secondaries market, according to a London-based partner at a law firm. Dyal Capital Partners, which acquires minority equity stakes in the management companies of private equity firms, and other firms using similar strategies could be attractive to secondaries buyers due to the diversification they offer through exposure to the manager’s various funds and underlying assets.
Younger-vintage assets will make life easier for GPs
According to data from Campbell Lutyens, 2006- and 2007-vintage funds accounted for around half of secondaries market volumes in 2016, a figure which dropped to below 40 percent in 2017. At the same time, 2017 saw an appreciable increase in the proportion of newer vintage funds to hit the market; in fact, it was the first year that funds of 2014-, 2015- and 2016-vintage changed hands. Richard Hope, managing director, fund investment team Europe at Hamilton Lane, believes this could have positive implications for GPs’ ability to price assets going into 2018.
“With those funds which are over 10 years old, many of the good assets have been sold; the tail of the portfolio normally surprises to the upside, but it’s a question of how much it surprises,” he says. “For a 2010-vintage portfolio, the portfolio is more diversified, you can do your full underwrite, find out about their profitability and what revenue growth has been like. You get the opportunity to participate in more exits as the fund matures.”
European carry model will drive GP-led deals
European-style carried interest, which is calculated based on capital being returned from all investments, as opposed to the US-deal-by-deal model, means GPs have more of an economic incentive to restructure their funds, according to one legal source.
Fear of a market-destabilising event over which GPs have no control means European managers are also more incentivised than their US counterparts to sell off remaining assets in a bundle and lock in value for the purposes of the carry waterfall. Expect more brand-name European GP-led deals in 2018.