Looking forward: North America in 2017

GP-led transactions and mega-deals will continue amid a possible drop in pricing.

Market participants in North America give us their take on what 2017 will bring for the sector. Most think 2016 trends, including GP-led transactions and the dip in pricing, will continue into 2017.

There will be downward pressure on pricing

Nico Taverna, head of secondaries at private equity firm Adveq, which just launched its North-America focused Adveq Technology VIII, predicts that the slight tapering in pricing in the US secondaries market will continue into the new year due to lower distributions from underlying portfolios.

“We think the lower distributions will be reflected in prices,” he says. “I don’t think it’ll be a drastic fall but they will be lower.”

In the venture capital space, a similar downwards pressure on pricing could happen. According to Hans Swildens, founder of venture capital-focused Industry Ventures, pricing will continue to go down, as valuations will be flat-to-down period on period.

[quote]Flat is the new up[/quote]

“Flat is the new up and we’ve seen securities get marked down proactively,” he says. “I’d predict a lot of venture funds will scrub their books and rationally prices the securities as they put a more realistic value on unicorns. If that does happen, there will be an increased volume of buyers and sellers transacting.”

Interest in GP-led deals will keep growing

The GP-led part of the secondaries market will continue to gain in importance. New 2nd Capital founder Tjarko Hektor thinks the recent surge will spill over into the new year, especially in the lower end of the market. “The GP-side of the market will be definitely bigger,” he said. In particular, GP-led transactions will happen earlier in a fund’s life as fund managers become more proactive and take advantage of the secondaries market.

In particular, tender offers will grow in importance as they present friendlier options to LPs than fund restructurings, according to global private equity firm Ardian’s US co-head US Vladimir Colas. “We’ve seen GPs organising tender offers for their fund, with no change in terms and no restructuring of the vehicle,” he says. “It will become a larger part of the market than GP-led fund restructurings, which occurred more than LP tender offers. But I think people are cooling down on GP restructurings because of alignment.”

More capital will flow into the secondaries market

Fundraising was strong in 2016, having easily surpassed 2015 levels. Ardian US co-head  Mark Benedetti refers to the “massive amount” of growth that the US secondaries market has seen in the last decade when predicting that the upward trend will not stop.

“We’re seeing more net inflows into the private equity asset class; by all accounts, more investors are looking to access the market, and this will drive further secondaries deal flow growth,” Benedetti says.

Taverna points to the “massive fundraising” in the primary market, which seen some GPs double their fund sizes. “They raised a lot of capital and at some point, that will drive growth on the secondaries side,” he says. “But with prices still relatively high and qualities somewhat mixed, investors will have to stay disciplined.”

Mega-deals will be a big part of the dealflow

Colas says 2016’s active dealflow on the larger end of the market will remain in 2017, with several billion-dollar transactions in the pipeline. This is thanks to various LPs such as sovereign wealth funds and public pension funds testing the secondaries market. For example, the California Public Employees’ Retirement System kicked off the year with the sale of $1 billion portfolio of fund stakes in March, and a similar-sized portfolio sale by Employees’ Retirement System of Texas to Lexington Partners in September.

“We expect that it will be a big part of the dealflow in 2017, or even a little larger year for it than in 2016,” he says.