Uncertainty and fewer sales of older assets were major reasons for the slump in secondaries deal volume by dollar amount in 2016, according to market participants.
Total transaction value fell about 8 percent to $37 billion from $40 billion in 2015, according to Greenhill Cogent’s Secondary Market Trends & Outlook January 2017 report.
“You had huge spikes in volatility,” Ian Charles, a partner at secondaries firm Landmark Partners tells PEI. “In Q1, oil dropped back down to $30 per barrel and there was the Chinese devaluation scare. In Q2, there was Brexit and Q4 the election of [Donald] Trump. So, three of four quarters last year had some big event that caused large sellers and buyers to hit pause.”
Charles notes real estate secondaries contracted about 20 to 25 percent while private equity buyout secondaries fell by 9 percent. Although buyout was the only strategy within private equity – in which he includes venture capital, mezzanine and fund of funds – to fall, it accounts for so much volume it brought down the overall private equity transaction value.
Paul Lanna, partner at Coller Capital, suggests a different reason for the falling deal value.
“There are several contributing factors. First, the biggest imbalance in the portfolios of many large pension funds after the financial crisis was an over-exposure to ‘boom-year’ vintage funds, so many pension plans saw the sale of large portfolios of 2006-2008 funds as a priority. Attractive pricing in the last few years enabled them to achieve that,” he says. “Pre-crisis fund positions are still being sold, but they are older now, and have continued to distribute capital, so the funds themselves are smaller. In 2013 and 2014, there were a number of US financial institutions selling large pools of assets, and these are largely gone from the market now. Last year also saw a lot of smaller, tail-end transactions, many of which were driven by funds of funds looking to wrap up at the end of their lives.”
Greenhill managing director Andy Nick tells PEI he’s aware of multiple billion-dollar secondaries sales in the pipeline that may come to market before the end of the second quarter.
“Without any economic shock, we’d expect robust pricing to continue, which should drive secondaries volume to be at or above the 2016 level.”
This article appeared in the April issue of Private Equity International.