Secondaries buyers seek bounty amid coronavirus chaos

Buyers with an appetite for unfunded commitments could be an early beneficiary of coronavirus-related volatility.

Last week, Secondaries Investor reported that Partners Group was gearing up for a spike in secondaries deal activity caused by market volatility brought about by the coronavirus pandemic.

Since then, in conversations with more than seven industry sources, it’s clear they are not the only ones.

Although it will be some time before the public market collapse feeds through to pricing on the secondaries market, some buyers and advisors are already fielding preliminary calls from limited partners. LPs, who are not in dire need of liquidity, are starting to reassess the likely duration of the slump and the impact it will have a quarter down the line, said one Europe-based buyer whose last fund closed in 2017.

“As happened in 2008, some investors are expecting to find themselves over-allocated to private equity because their public market portfolios have declined so dramatically. I expect we’ll see endowments, foundations and others selling off positions in some very good funds at attractive prices,” he said. 

The first assets likely to hit the market will have a large unfunded component, according to two buy-side sources. Offloading these portfolios allows LPs to reduce their PE exposure and future liabilities while minimising the impact to their portfolios’ net asset values. These deals – while not for everyone – can act as a nice kicker in a well-diversified portfolio.

“We were the beneficiary in the [previous] crisis of buying into funds that were 15 percent-20 percent called,” said one of the sources, a senior UK-based buyer, adding that it will take longer for more mature portfolios to come to the market. “We paid very little for the money in the ground and took over the outstanding commitments.”

Infrastructure, real estate and credit could all come to the fore in the next few months, said one senior London-based advisor. Some buyers might view taking a credit position in PE-backed companies as safer than an equity position amid the crisis.

“The infrastructure market, excluding the transport sector, is likely to see significant institutional demand, especially from yield-hungry institutions, with rates coming down,” the senior advisor added.

The GP-led market – effectively closed for the time being due to diverging price expectations – will derive some benefit from market volatility, according to two buy-side sources. The crisis has forced shut the exit window, scuppering the realisation plans of many good-quality GPs. They may have to explore ways of holding onto their assets for long enough to secure a satisfactory sale.

On the flipside, buyers are likely to be even more concerned about concentration risk, potentially hurting the single-asset market, one of the sources said.

A question of timing

Knowing exactly when these opportunities will come to market is tricky. Like a frog in a pan of slowly boiling water, LPs often experience a gap between perception and reality, taking some time to internalise the effect of economic crises on the value of their portfolios.

“Sellers are always so focused on accounting values,” said one mainland Europe-based buyer who targets discounted deals. “Even a small transaction at a deep discount, warranted by the low quality of a fund, is difficult to get approved. Now, even for good funds, you’re likely to see a discount.”

The secondaries market is much better known than it was during the last crisis, when it took until late 2010 for big distressed positions to start hitting the market. Today, those with a need to sell know exactly who to call.

“There’ll be reduced friction this time around,” said one US-based buyer. “It’s easy to call up Greenhill or Evercore and say ‘Hey guys, dust off that engagement letter we had two years ago. Here’s my portfolio, the board’s already approved it, let’s go out and sell’.”