Loving the fresh powder

Secondaries fundraising hit a post-crisis high in the first half of the year, but the expanding market can take it, say investors.

Fundraising in the secondaries market reached new heights in the first half of the year, with the largest amount of capital raised in H1 since the global financial crisis, and the highest average fund size.

Eleven secondaries funds held final closes on a total of $19.9 billion in the first half of the year, compared with nine funds closing on $13.4 billion and 19 funds closing on $19.2 billion in the same period in 2015 and 2014 respectively, according to data from PEI Research & Analytics.

This is partly because the large secondaries players are raising ever-larger funds. One of the funds to wrap up in the first half of the year was the largest dedicated secondaries fund ever: Ardian Secondary Fund VII, which closed on $10.8 billion.

We are currently on track, then, to at least equal last year’s $40 billion of capital raised. Several market participants anticipate that fundraising for secondaries will settle in the $35 billion to $45 billion a year range for the next couple of years. The tally from the first six months seems to confirm these predictions. “I think it will be about the same this year,” a partner at a large secondaries buyer says. “I don’t see any slowdown right now in fundraising.”

One secondaries advisor concurs: “Fundraising will likely be similar in the second half of the year,” he says, pointing to some of the large funds currently in the market and on track to close in the remainder of 2016. Goldman Sachs Asset Management, for example, is seeking $5 billion for its Vintage VIII fund and has raised at least $3 billion in just a couple of months.

Other firms on the road include the Blackstone Group’s Strategic Partners, AlpInvest Partners and LGT Capital Partners. If they – along with Goldman – all hold final closes before the end of the year, they will account for at least $15 billion in new capital between the four of them.
In total, there are currently 59 funds seeking to raise $26 billion, according to PEI data (although they won’t all close this year). A lot of these funds are on the smaller side, including some debut secondaries funds, which typically take longer to raise than the established brand name funds.

“While secondaries continues to be a good area for fundraising, new entrants still find it difficult,” a lawyer tells Secondaries Investor. Those who succeed need some sort of “special story”, such as a team that has come out of a big name, and a track record. “Secondaries have developed so much in the last 10 years and there are people out there with really strong track records and stories; it’s going to be harder for people to come into that,” he said.

With such healthy fundraising numbers, thoughts inevitably turn to dry powder, and whether the amount of capital awaiting deployment will start to distort the market. Market participants are not worried; dealflow will increase to absorb the capital, they say.

“When you look at the types of sellers now entering the market, the type of portfolios they own are very large,” one secondaries buyer says. “So if you see them continuing to access that liquidity regularly, you could see a much bigger secondaries market.”

Will the market grow fast enough to accommodate the inflow of LP capital? With increasing macro uncertainty, driven in part by the political upheaval in Europe, making institutions adjust their private equity portfolios in line with the changing landscape, it certainly seems likely.

Are you concerned about the amount of dry powder in the secondaries market? Email me at Marine.c@peimedia.com