NYPPEX: Fewer exits will lead to Q1 pricing drop – exclusive

Weak IPO and M&A activity in Q3 will lead to average high bids falling by as much as 9 percentage points, according to a report obtained exclusively by Secondaries Investor.

Fewer exits during the third quarter of this year will lead to a drop of as much as 9 percentage points in bids for fund stakes, according to a report by NYPPEX Private Markets obtained exclusively by Secondaries Investor.

Weak IPO and M&A activity during the period combined with “shockingly low total returns” from institutional investors such as endowments and pension funds for the year to 30 June made buyers more selective about which funds they acquired interests in, the advisory firm wrote in a 17 October client memorandum.

“NYPPEX projects this trend will result in lower secondary bids by 4 percent to 9 percent over the next six months for interests in private equity funds on average, as weaker distributions year-over-year decline further in the fourth quarter of 2016 and first quarter of 2017,” the firm wrote.

Average high bids for fund strategies in the US remained stable, while Asia-Pacific had the most volatility. Bids in that region fell by as much as 3.1 percent for distressed debt, and rose by as much as 6.7 percent for natural resources, according to NYPPEX‘s estimates.

Europe was the only region where average high bids rose across all strategies – as much as 4.4 percent for natural resources.

Low valuation multiples for European stocks and the belief that Brexit will be modified caused buyers in the third quarter to increase demand for European private equity funds, Laurence Allen, NYPPEX’s chief executive, told Secondaries Investor.

Strategies that rely on IPOs and M&A for exits such as buyout and venture will likely be most impacted, while those not correlated with stock market conditions such as distressed debt, real estate and infrastructure will be less impacted, Allen said.

Slightly lower bids combined with 40 percent to 50 percent lower distributions will be a “silver lining” for deal volume, he added.

“Some sellers will be concerned about secondaries bids declining further, while others will have less incentive to hold funds that are not making distributions”, leading to increased supply for buyers.

Source: NYPPEX