Research & Data

NYPPEX suggests more active portfolio management

Sentiment in the secondaries market could turn sour in the fourth quarter, so NYPPEX recommends buyers adopt a more hands-on approach to maintain returns.

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NYPPEX Private Markets is predicting secondaries private equity buyers will start to turn negative in the fourth quarter, mainly due to a slowdown in private equity exits and cash distributions, according to a report it published this week.

The slowdown in exits and distributions will cause more secondaries supply to flood the market and will put pressure on prices as a result, it added in 2015 Midyear Secondary Private Equity Market Trends and Outlook Worldwide.

With that in mind, NYPPEX, a secondaries intermediary, suggested what secondaries buyers should do to get greater returns from their portfolios.

The firm recommends secondaries funds manage their portfolios more actively and embrace transaction speed as a strategic tool. For example, funds should consider providing confidential buy and sell lists of target funds or companies to intermediaries to speed up deployment of capital. This should also help with monetising older unrealised assets and raising capital for new funds, NYPPEX noted.

“We believe the secondary markets for interests in the largest 150 funds worldwide has entered a new phase of maturity as liquidity is deep and prices are very fair for sellers,” NYPPEX chief executive officer Laurence Allen said. “Secondary funds need to pivot and revise traditional buy and hold strategies to generate consistent superior returns.”

The firm makes three main recommendations for active portfolio management:

  • Secondaries firms can reduce risk by divesting underperforming private equity funds on a quarterly basis.
  • Secondaries firms can generate operating efficiencies by divesting end-of-life private equity funds through a quarterly sales program.
  • Secondaries firms can generate incremental returns by rapidly acquiring secondaries interests at price discounts to net asset value in pre-approved funds.

NYPPEX saw secondaries transaction volume increase by about 2.5 percent to $18.7 billion in the first half of the year compared to the same period last year. It estimates that transaction volume for 2015 will increase about 11 percent to $40.6 billion compared with $36.5 billion in 2014.