“Prophesy is a good line of business, but it is full of risks,” Mark Twain (supposedly) said. The risk has never discouraged Secondaries Investor, which each year in December taps the wisdom of the market to come up with a batch of predictions for the year ahead. With quiet season upon us, it seems like a good opportunity to see how they are working out.
Our headline prediction – that barring a major economic shock, 2018 will be a record year for secondaries transaction volumes – is looking good. The first six months of the year saw $27 billion of trades, according to Greenhill Cogent, compared with $22 billion last year – the previous first-half record. Evercore pushed this figure even higher, at $32 billion, an 18 percent year-on-year increase. Given the tendency for the second half to be busier, a record year looks like a certainty.
‘A wider range of geographies’
As we predicted, and as our interactive map of GP-led deals shows, the geographical scope of the secondaries market is continuing to broaden apace. But we downplayed the idea that 2018 could be a breakthrough year for GP-led deals in Asia, arguing that there was a lack of suitable candidates: “if you’re first-quartile you don’t need to restructure, if you’re below that, you can’t fundraise”, we said at the time. Deals can always fall apart, but with names such as L Catterton and TPG embarking on GP-led processes on their Asian funds and the Standard Chartered spin-out moving a step closer to completion, we may well be proved wrong.
‘Younger-vintage assets will make life easier for GPs’
Last year 2006- and 2007-vintage assets dropped below 40 percent of traded secondaries volumes, according to Campbell Lutyens, and we forecast that 2018 would see an appreciable increase in the volume of younger-vintage funds hitting the market. While the general age and quality of portfolios is probably higher than last year, there are still plenty of crisis era funds around. Many of these are mature funds of funds opting to sell all or part of their portfolios (15 percent of the market by volume, according to Cogent), a trend carried over from 2017. “I’d say we’ve seen a noticeable, but not a seismic shift in vintage,” said one London-based secondaries buyer.
‘GP interest transactions may become dealflow’
Some of our predictions are falling wide of the mark at this interim stage. The buzz around GP interest transactions is strong, but there is no suggestion that divestments by funds from firms such as Dyal Capital are becoming a true form of dealflow for secondaries buyers – at least not yet. And while secondaries funds are becoming ever more differentiated in terms of strategy, it’s a little too soon to tell if this will result in greatly divergent returns, as we predicted.
Given the rate of change in the market, predictions will always involve a degree of second-guessing. But while it remains ‘a good line of business’, we’ll keep making them.
Has anything about the secondaries market greatly surprised you in 2018? Let Rod James know on email@example.com.
PS. Look out for our Young Guns of Secondaries Class of 2018 next week, which includes our first wildcard entry. Stay tuned.