Institutional investors kicked off 2023 with a renewed appetite for exploring the secondaries market. Despite a lack of transaction volume, many investors are actively reviewing their portfolios, trying to understand value and having conversations to establish pricing. Given the unprecedented increase in interest rates, equity market volatility and the economic outlook, there remains a bid-ask spread that continues to hold back activity.
In the UK, for example, real estate transaction volumes during Q4 2022 were at their lowest levels since 2010. Due to substantially higher borrowing costs, many investors were unwilling to pay 2021 prices. The denominator effect, market uncertainty and the expectation that real estate values are falling have led many investors to pull back from the market.
The bid-ask spread is often too great to bridge. Existing owners point to the quality of their assets, the lack of precedent transactional evidence and the robustness of their current valuations. Whereas secondaries buyers go to their investment committees underwriting steep markdowns.
“We’ve been hit hard by the denominator effect; decided to go to the secondary market to get liquidity”
North American Pension Fund
The inability of buyers and sellers to find common ground has curtailed manager-led secondaries transaction volume after years of strong growth. Manager-led transactions are still getting done, if there is time pressure and a real need for liquidity, or where the assets are suitably attractive. As the wave of refinancing approaches, we can expect to see more recapitalizations undertaken to fill funding gaps and prevent the need for outright sales into a re-basing market.
Notwithstanding the sentiment regarding pricing, many investors are exploring the potential to tap the secondary market in response to pressures to rebalance portfolios and access liquidity, or simply to reallocate to different strategies in a changing market.
This includes investors in open-end funds, who face an inability to redeem and see a secondary trade as a means to access liquidity – provided they can adequately bridge the bid-ask spread and find a buyer when many of their peers are in a similar situation. At
the same time, this represents an opportunity for investors with the appetite and capital to deploy into such situations.
“Expect to see further discounts; pausing on new investments to
see how the situation plays out”
Global Fund of Funds Manager
While a healthy amount of uncertainty is likely to remain during the first half of 2023, we expect secondaries transaction volumes to pick up as prices stabilize and we get more clarity over interest rates and the economic outlook.