Pricing has reached a six-year quarterly high with fund stakes trading at par with net asset value, as buyers seek to deploy capital rather than focus on returns, according to data from intermediary PEFOX.
Average bids for stakes in the PEFOX Core 100 funds, which comprises 100 of the most commonly traded fund names globally, reached 100.2 percent of net asset value based on a 30 September valuation date. The firm based its figures on bids received between early January and mid-March.
“Knowing that the average fund is trading at par implies that on average these funds are expected to achieve a 1.2 to 1.3x return,” Kishore Kansal, PEFOX managing partner told Secondaries Investor. “For this to happen the Dow would need to be trading 30 percent-40 percent higher and the FTSE even higher than that. It seems the Trump rally is running out of steam and there’s no more momentum to drive the market further. There is a fundamental mispricing in the market.”
Large amounts of capital overhang is putting pressure on buyers to deploy capital rather than seek strong financial returns, and this is the dominant driver of the surge in pricing, the firm noted.
Dry powder for secondaries is estimated at between $90 billion and $105 billion, according to separate reports by Evercore and Lazard.
The pressure on general partners to deploy capital comes from their limited partners, according to Kansal.
“Underlying LPs should reward buyers for not putting money to work, but in reality the market doesn’t work that way – it doesn’t reward discipline,” he said.
In some of the firm’s recently closed transactions there has been a widening of spreads between the buyers. In one case involving an older-vintage, mid-tier buyout fund, the winning buyer bid 102 percent of NAV while the second-highest bid was 85 percent of NAV.
The firm has advised on more than $100 million of secondaries transactions this year and two-thirds of its deals have involved secondaries buyers as sellers.
Kansal also noted buyers are increasingly using deal-level leverage for single-line interests.
“Historically leverage only came into play when there was a diversified cash flow stream, perhaps across three or four funds. What we’re seeing becoming much more common today is leverage applied to single fund interests, where there is far more risk on the cashflows of that single manager,” he said.