Secondaries bids soar in first half of 2010

The average high bid for secondaries stakes in the first half of 2010 was up 17.5 percentage points from the second half of 2009, reflecting increased exit opportunities and a clearer sense of portfolio company values.

According to a newly released pricing study from Cogent Partners, the average high bid for secondaries stakes in H1 2010 was 79.6 percent of net asset value, an increase from the high bid average of 72 percent of NAV in the second half of last year, according to Cogent Partners.

The increase becomes even more pronounced within buyout funds, where the average high bid in the first half of this year was 86.4 percent of NAV, up from 68.9 percent in H2 2009.

Pricing improvements also resulted from an increase in demand, especially from traditional secondaries buyers who waited on the sidelines through most of 2009, Cogent said.The increasing bid prices were the result of several things, including “an increase in general partners’ visibility into potential exit timing and portfolio company values, which has been buoyed by numerous announcements of IPO filings and trade sales of sponsor-backed companies during the first half of 2010”, Cogent said in the pricing report.

“Bids submitted by buyers under some pressure to deploy capital more than compensated for continued global macroeconomic uncertainty precipitated by factors such as volatile equity markets, fluctuating commodity prices, and significant weakness in the Euro,” Cogent said.

The increased bid prices have led more sellers to put assets for sale, which has led to larger deals getting done than last year, “particularly from financial institutions”, Cogent said.

Buyers also began demanding “funded” assets, as opposed to the unfunded stakes that less traditional buyers were snapping up last year. The average fund marketed in H1 2010 was 73.6 percent funded and 71 percent of the funds were more than 50 percent called.

More sellers are putting up funds related to natural resources, real estate and distressed investments, while venture funds have all but disappeared from the secondaries market, Cogent said. Venture funds accounted for only 2 percent of the funds Cogent marketed in H1 2010, much less than in past years, the firm said.

“Potential sellers have an interest in parting with portions of their venture fund portfolios, but holding these funds continues to be relatively more attractive given the discount to NAV at which most venture funds are likely to transact,” Cogent said.