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Looking forward: North America in 2016

GP-led restructurings will continue to represent a growing part of the secondaries market, while buyers can expect more jumbo deals coming their way.

After a robust secondaries market in 2015, several market participants gave their US perspectives on what to expect in 2016.

It will be more of the same on many levels. For example, as the secondaries market is maturing, transaction volume will be more or less around the same level from one year to the next, unless there is a major financial crisis, which is unlikely in 2016. Some existing trends from 2015 will also become more pronounced, while dormant secondaries market like the one for energy fund stakes might become more active.

There will be more GP-led restructurings, and not just of zombie funds that have failed to raise new money. General partners will increasingly learn to take advantage of the secondaries market to help raise new funds or accelerate divestments.

Secondaries professionals anticipate the market will see more jumbo portfolios for sale.

There were a few large portfolios of limited partnership stakes in 2015, including the California Public Employees’ Retirement System’s $1 billion sale of private equity interests and its $3 billion sale of real estate fund interests. These jumbo secondaries transactions will become more common as limited partners are more comfortable with the strategy and see successful outcomes and continued attractive pricing.

“Some pension plans are working on large portfolios for next year,” Benoit Verbrugghe, head of Ardian US, said. “The big players will continue to be active. We already have a good visibility. You could find big transactions of more than $2 billion, and not only one but maybe three or four.”

More specialised secondaries activity will continue. Activity in the real estate sector will keep growing, following CalPERS’ successful portfolio sale, while many predict that 2016 might be the year of energy secondaries once commodity prices stabilise and market participants feel more comfortable with the space.

Public market volatility will likely continue in part as China figures out how to manage slower growth. In turn, it may impact GPs’ net asset values and affect how secondaries investors price their transactions.

“While it is not clear if the second-longest bull market ever will come to an end, it is clear that we will continue to see volatility,” Eric Zoller, co-founder and a partner at Sixpoint Partners, said.

One consequence will be that high-quality managers will continue to price strongly and pricing will be more asset specific and vintage specific.

“We expect that fully-committed, mid-life funds of vintages 2009 to 2012 will garner the best price,” he said. One reason is that older private equity funds have divested most of their attractive saleable companies, leaving struggling or in-transition companies in those portfolios.

Additionally, mega buyout funds from 2005 to 2007 that have significant public equity exposure will have more challenging pricing, according to Zoller.