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Secondaries firms are becoming more selective on deals – update

Some buyers are passing on up to 98% of deals that come through their doors.

The story was updated to add comments from HarbourVest.

Secondaries firms are passing on a majority of deals on the secondaries market in the hunt for good quality purchases, according to some industry participants.

Despite deal flow being ‘hot’, the proportion of good quality deals that will return positive multiples is relatively low and they are also time-consuming to find, they said. In some cases this is due to sellers being left with lower-tier stakes to unload, as well as to a high pricing environment making it more difficult for buyers to justify some purchases.

“Finding good quality deals at fair valuations is challenging in the current environment, with stock markets at all-time highs and very hot credit and M&A markets,” said Dave Lamb, a partner at private equity firm Vision Capital that is involved in direct secondaries. “Any new investments need to be evaluated in the context of what happens if we see asset price deflation from here.”

One market participant at a firm that buys multiple and single portfolio companies agreed the time and effort to find good deals can be exhausting.

“It takes a lot of time and effort to find good quality deals, and especially with the bidding process, ultimately you’re waiting for the phone to ring telling you you’ve lost it, or another exit has been found, or you’ve won it,” he said. “Hopefully you’ve won it.”

Other firms have expressed similar views. Partners Group‘s secondaries team declined over 98 percent of the $71 billion of private equity deals screened in the first half of this year, according to a recent report, with co-chief executive André Frei saying the firm wanted to be even more selective on secondary transactions as price levels further increase.

“The challenge for us is not where to find the next deal, it’s which one you want to pursue, where do you want to allocate the resources, which one do you want to go after,” said David Atterbury, managing director at HarbourVest Partners in London. “The quality of the team and quality of assets is the first cut in that process.”

HarbourVest passes on a lot of transactions and has a very tight screening process, Atterbury said.

“Our conversion rate in terms of closed transactions versus the deal flow we see on any given year is somewhere around one to two percent.”