High valuations are darkening Partners Group‘s view on the secondaries market, according to its 2019 Private Markets Navigator report published on Tuesday.
The Zug-based asset manager is slightly underweight on all types of mature secondaries going into next year, with the exception of emerging markets venture capital, towards which it takes a neutral view.
In last year’s report the firm took a neutral view on mature American VC assets from a secondaries perspective. Elevated valuations are behind the the change in outlook, the firm noted.
Partners Group has also downgraded its outlook on inflection, or early stage, Asian and emerging market buyout secondaries to neutral from high attractiveness. This is “in light of recent pressures on emerging market currencies as a consequence of the strengthening USD, negative public market developments and geopolitical uncertainty.”
The only upgrade from the previous report is the neutral outlook assigned to European mature buyout secondaries, which were rated strongly underweight last time around. This is due to recent “very strong exit activities”, the report noted.
According to Anthony Schontz, co-head private equity integrated investments Americas, high pricing is a discouraging factor, particularly when it comes to LP transactions, which is Partners Group’s primary interest in its private equity secondaries business.
He believes that public market volatility and an oversupply of secondaries transactions is already placing some downward pressure on pricing, which could bode well for the future.
“Despite all the dry powder, buyers can be selective and auctions are not as competitive as they were,” he said. “There have been auctions with two or three bids when 10 to 15 were expected.”
These ratings come in the context of increasing competition from private equity managers, strategic buyers and new entrants driving company valuations to new highs, Partners Group noted. It has increased the multiple contraction assumption it uses in its underwriting from 0.5x in 2016 to 1.4x for investments made today.
Partners Group’s last dedicated private equity secondaries fund closed on its €2.5 billion target in 2016 after a year in the market, according to PEI data.