Macro in mind: returns and real assets

Macroeconomic concerns have weighed on secondaries market participants' minds over the last 12 months and have had varied effects.

One trend set to continue in the secondaries market this year is a growing rift between higher quality funds and those perceived to be of lower quality, according to a report by Credit Suisse.

Indeed, pricing has risen to near record-high levels, with median pricing for private equity fund stakes at 95 percent of net asset value during the second quarter, the second-highest quarterly level ever, the bank found.

“The secondaries market continues to bifurcate in terms of those seeking to access high-quality LP positions at prices around NAV and those seeking diversity in tail-end portfolios, with steeper discounts and use of structuring to generate their returns,” says Mark McDonald, head of EMEA and Asia secondaries advisory at the Zurich-headquartered bank.

Market participants at the beginning of the year also pointed to an expected rise in dealflow for real assets secondaries, with the massive collapse in commodity prices and the increasing acceptance of deals in related asset classes expected to spur transactions. Energy-related secondaries deals in particular were expected to boom, as potential sellers realise the drop in commodity prices was more than just a blip and seek liquidity for their investments.

“As a buyer with expertise and the capital to put to work in that strategy, that’s an interesting place to be right now,” Jeff Keay, a managing director at HarbourVest Partners, told sister publication PEI in April.

As of press time, the uptick in energy secondaries still seemed a little while off – a second half story at least. Energy and infrastructure stakes accounted for just 2 percent of funds marketed by Greenhill Cogent during the first half, smaller than any other strategy.

Real estate appears to have fared better. Deal volume in the asset class accounted for one sixth of total market volume and annual growth has been in excess of 30 percent between 2012 and 2015, according to data from Landmark Partners.

“Over the past few years, the real estate secondaries market gained a lot of visibility and validation,” says James Sunday, a partner at Landmark Partners. “This, coupled with LPs’ increasing desire to more actively manage denominator issues, rebalance between different sectors and strategies, and reduce number of GP relationships, should lead to significant transaction volumes looking forward.”

Looking ahead, macroeconomic challenges continue to weigh heavy on market participants’ minds. Wouter Moerel, a managing director at AlpInvest Partners, expects there will be a cyclical economic downturn in the next year or two, telling PEI in April the LP portfolio market would thus become more attractive as leverage becomes harder to obtain and pricing reduces.

Others point to the mismatch between record high levels of fundraising and the drop in deal volume in the first half.

“Historically, the market for supply and demand has grown in lockstep; the value of deals cleared in the market is replaced by new capital raised in the market,” says Adam Howarth, managing director and co-head of private equity secondaries at Partners Group. “This may be the first year where the one-to-one ratio is off and there is more capital raised than transaction volume completed. It is still too early to call this a trend – this year might just be a blip.”

One thing is certain: political risk and its effect on public markets will remain a big theme, and a sharp correction would lead to a drop in pricing and sellers becoming less active, according to Greenhill’s Engelien.

“You have elections in the US in November, elections in France and Germany next year,” he says. “Public markets obviously react to political developments and that could certainly have an impact.”

This is the second half of an article that appears in the September issue of Private Equity International. Click here to read the first half.