Private equity itself won’t bring down pricing

Secondaries valuations have reached a record high; will they keep climbing in 2015?

This week Secondaries Investor published an exclusive market update from Credit Suisse, which revealed private equity secondaries prices had reached a record high.

For anyone following secondaries, this can’t have come as much of a surprise: the upward trajectory has been going on for a good while now.

Still, the numbers CS were able to present made it very clear just how keen the market is on buying fund interests: during the third quarter the average price for private equity fund stakes traded on the secondaries market was 96 percent NAV, up from 93 percent mid-year and 90 percent at the end of 2013.

Several factors contributed to the increase, including the pressure to deploy the market’s $50 billion of secondaries dry powder. But the most significant driver is, and will continue to be, exogenous to the private equity market.

“Looking over the longer term, secondary pricing will depend to a large degree on relatively benign macro-economic conditions and the resilience of public equity markets,” Mark McDonald, a director in the private fund group at Credit Suisse in London, told Secondaries Investor in an interview.

McDonald expects secondaries prices to sustain into the first half of 2015, but he doesn’t foresee them increasing much further. That is unless volatility and geopolitical risks become more prevalent later in the year, which will have “an adverse impact on secondary pricing”.

One New York-based advisor agreed, adding that he believes it would take a public market shock for secondaries prices to fall.

“Factors that would drive pricing down are external to the secondaries market today. There would have to be a macro event that causes people to have less confident views than they currently have toward private companies.”

There is currently no shortage of potential disruptors that could bring about this change of sentiment. Think Russia for instance, or oil, or the connection between the two of them. But for the time being, if you’re going to buy secondary assets today, you better be prepared to pay a full price.