Return expectations fall for second year running

'PE directs' were underwritten at higher target multiples than purchases of stakes in any type of strategy last year, according to Setter Capital.

Fund restructurings and purchases of single minority stakes were the best strategies to follow as secondaries return expectations fall for a second year in a row, according to a survey by Setter Capital.

PE directs, which the advisory firm defines as GP-led restructurings and sole minority interests in funds and co-investment vehicles, were underwritten to 19 percent net internal rates of return and 1.74x target multiples. This is higher than purchasing limited partnership portfolios of stakes in any strategy or asset class, the Volume Report FY 2016 noted.

Acquiring stakes in venture capital funds was the second-best strategy, delivering expected returns of 18 percent IRRs and 1.59x multiples. Infrastructure was expected to deliver the lowest at 10.3 percent and 1.39x.

Setter’s survey, which is based on responses from 94 of the 119 most active and regular secondaries buyers, also predicts average gross multiples for secondaries will fall this year to 1.38x,  from 1.41x for 2016 and 1.43x for 2015.

More than half of the respondents also said they felt more general partners attempted restructurings or liquidations for older funds last year than they did in 2016.

The jury is still out as to whether GP-led restructurings will ultimately deliver the returns they are being underwritten to, one New York-based buyer told Secondaries Investor, adding that this will become more apparent as the spread between returns from first quartile and third quartile secondaries funds widens.

“Some of them will be really good deals and some of them probably won’t be as good deals,” the buyer said. “That will cause a little bit more dispersion across returns across all secondaries funds which may focus on the different strategies.”

Deal volume fell 15 percent to $42.2 billion last year as total purchases from buyers deploying more than $1 billion during the period fell 20 percent, according to the report. The full year figure, which includes private equity, real estate, infrastructure, hedge funds and agri/timber funds, is the highest reported so far, above Triago’s $39 billion and Credit Suisse’s $31 billion. Setter notes its figure is “conservative” as it does not include the activity of more than 1,000 opportunistic and non-traditional buyers such as sovereign wealth funds.

Private equity funds and direct secondaries totalled $34.8 billion, down 8 percent percent, while real estate had the biggest drop, falling 48 percent to $4.8 billion.

Trading of stakes in debt funds, funds of funds and energy funds all rose, to $1.4 billion, $1.1 billion and $973 million respectively.

Setter’s report also found the following figures for 2016:

  • The 10 largest buyers accounted for a smaller portion of deal volume at 58 percent, down from 62 percent the previous year
  • Pension funds were the most active sellers, accounting for 37 percent of dollar volume, and are expected to remain the most active sellers in 2017
  • The average deal size decreased 12 percent to $38.8 million


Source: Setter Capital