Secondaries a ‘buyers market’ going into H2 – Cebile report

Buyers have become more selective and have emphasised the importance of alignment in GP-led deals, according to the advisory firm's latest survey.

The return of deal supply has made secondaries a buyers market characterised by strong pricing and high levels of buyer activity, according to a survey from Cebile Capital.

The advisory firm and placement agent’s H2 2021 Outlook Secondary Survey, obtained by Secondaries Investor, is based on responses from more than 50 secondaries buyers and is the first report the firm has published since being acquired by Raymond James Financial this year.

Here are some key takeaways from the survey:

Fuel in the tank

Secondaries firms’ war chests have reached all-time-high levels thanks to strong fundraising. Last year nearly $80 billion was raised, illustrating strong demand amid the pandemic. Ninety percent of funds secured more capital than their initial targets.

The trend has continued so far this year. The first half saw $29 billion raised, with 50 percent of funds beating initial targets. Dedicated pre-leverage dry powder sits at $120 billion, up from $118 billion in 2020 and $101 billion in 2019, Cebile concluded.

The adviser predicts that this will be met by a record transaction volume of between $100 billion and $105 billion for the full year, thanks to the continued recovery from covid-affected 2020.

Managers deployed with more selectiveness

Almost all managers reported being equally or more selective when considering deals in the first half of 2021 versus the second half of last year.

The quality of prospective deals remained strong during the period, with 53 percent of respondents evaluating dealflow as above expectations and 9 percent reporting it as falling below.

Almost 90 percent of buyers closed the first half at or above their secondaries deployment targets thanks to the “plentiful” dealflow, up from 60 percent in Q3 2020 and 35 percent in Q1 2020.

Are we aligned?

Sponsors will have to ensure they are aligned if they want buyers to work with them on GP-led transactions.

Fully 80 percent of survey respondents noted that a lack of alignment – including GPs’ using secondaries deals as a means of cashing out and GPs not having enough ‘skin in the game’ – was a deal breaker.

It is critical to “ensure that we as a secondary buyer share a common view of success with the sponsor”, Jeff Keay, a managing director at Harbourvest Partners, told Secondaries Investor. “The ability to tailor transaction terms to achieve an appropriate alignment of interests is key.”

On your marks…

Buyers are optimistic about valuations going into Q3 marks, with most respondents predicting positive action. More than 90 percent anticipate that net asset values will be written up by as much as 10 percent at the end of the third quarter.

This represents a significant move past the economic uncertainty caused by the pandemic, according to the report. At the height of the pandemic, over 90 percent of respondents required double-digit discounts to back deals, with nearly half requiring a discount of greater than 30 percent.

Single-asset attraction

The pre-pandemic trend of buyers flocking towards more concentrated deals accelerated during the pandemic and is continuing. Over 60 percent of respondents said they saw more single-asset than multi-asset GP-led deals in the first half of the year.

Nearly 80 percent of respondents regard continuation vehicles as their most favoured GP-led deal structure going into the second half of the year. Twelve percent favoured tender offers and 10 percent favoured preferred equity options.

Conversely, 35 percent of respondents regard preferred equity as their least-favoured structure, while 29 percent opted for bridge funds, 21 percent for top-up funds and 15 percent chose tender offers.

Those structures fell out of favour due to lower returns, in the case of preferred equity, or the involvement of a primary/unfunded component, bringing unwanted blind-pool risk, Cebile concluded.