Though the global economy may be hitting some bumps in the road, the secondaries charabanc rolls on. Transaction volumes hit a record high in 2018 and there’s a good chance we’ll see record fundraising this year.
The medium term seems solid, too. According to Greenhill, dry powder sits at 2.6x the last 12 months’ transaction volume – sizeable but hardly worrying. Hamilton Lane believes there are more than 700 funds of at least 10 years in age with more than $20 million in remaining net asset value: natural targets for restructuring. Richard Olson, secondaries advisory head at Duff & Phelps, sees more M&A teams at investment banks directing their clients towards the secondaries market, a welcome new source of dealflow.
With everything rumbling along, could anything throw the market off course?
Public market volatility could. The fourth quarter of 2018 saw a sell-off on the public equity markets and volatility remains the order of the day. A regional head at one of the largest secondaries firms recently told Secondaries Investor that it doesn’t try to predict the performance of listed assets in its portfolio – “it’s not our area of expertise and there’s not much we can do about it”. As many of the largest buyout funds have considerable listed exposure, it could depress prices for those assets or cause buyer interest to cool.
A full-blown downturn could disrupt growth in the secondaries market if it caused LPs to systematically reallocate away from secondaries. If fundraising were to stall, buyers might try to conserve their dry powder, making them much more selective, discouraging sellers and choking deal flow, as Credit Suisse’s Jonathan Abecassis tells Secondaries Investor.
Then there is the risk from within.
According to Greenhill, GP-led processes accounted for 32 percent of secondaries deal volumes in 2018, a 71 percent year-on-year increase in dollar terms. It’s easy to forget, however, that these are relatively new transactions, the long-term impact of which is unproven. Will they prove a ‘win, win, win’ for all parties involved?
“In terms of how much has been achieved in these restructurings, it’s a bit early to tell,” said a managing director with a mid-sized secondaries buyer. “We hope that if you add some capital to that situation and have an incentivised investment team, you can get a better outcome. There’s a lot of people betting on these managers to do good things.”
Elsewhere, a scandal can rock a market: just ask Middle Eastern GPs trying to raise capital in the wake of Abraaj’s collapse. The action taken in September against Veronis Suhler Stevenson showed the Securities and Exchange Commission is serious about making sure GP-led deals are run transparently and with minimal conflict of interest. If a bigger, more influential GP fails to heed the regulator’s message, it could seriously dent limited partners’ trust in these processes, setting the market back.
The secondaries market is in rude health, but we are not taking this for granted.
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