Secondaries fundraising dips as market braces for 2020 onslaught

Fundraising for secondaries strategies dipped to a four-year low last year with a wall of capital expected in final closes in 2020, Secondaries Investor data show.

At least 32 funds collected $36.9 billion in the 12 months to the end of December, a 22 percent drop on the previous year and the lowest annual fundraising figure since 2015. The data comprises capital raised for secondaries, direct secondaries, preferred equity and fund of firms strategies.

The final close figures from 2019 do not necessarily reflect a drop in LP appetite for secondaries, said Bernhard Engelien, a managing director at investment bank Greenhill.

“The larger funds have really raised [their capital] in 2019, so for most of the LPs, it’s a 2019 commitment, even though the fund will have a 2020 final close,” Engelien said.

The top 10 secondaries funds in market alone are seeking a combined $72.5 billion, with Ardian and Lexington Partners among firms expected to hold final closes on mega-funds this year. Paris-headquartered Ardian is seeking $18 billion for its ASF VIII programme, including $6 billion in co-investment pockets, while New York-headquartered Lexington had raised $11.74 billion out of a $12 billion target as of October for its Capital Partners IX fund, according to filings with the US Securities and Exchange Commission.

The biggest funds to hold final closes last year were Strategic Partners’ Fund VIII, which amassed $11.1 billion; Glendower Capital’s Secondary Opportunities Fund IV, which collected $2.7 billion; and Adams Street Partners’ Global Secondary Fund 6 and Whitehorse Liquidity Partners’ Fund III, which both closed on $2 billion.

Dyal Capital Partners’ Fund IV also collected $9 billion for GP interests.

Increasing sizes of secondaries funds has pushed the average fund size above $1 billion for the last two years running. This compares with four years ago when the average secondaries fund was just $550 million, according to SI data.

The ratio of dry powder to deal volume over the last 12 months could be at a record low going into 2020 – between 1x and 1.2x, assuming around $90 billion of trades last year and around $170 billion of unspent capital including leverage at the end of June 2019, according to Greenhill estimates. This means the balance of power could be shifting back to buyers, Engelien said.

“[Buyers] have more choice and can take their time,” he said. “The ratio of dry powder to volume has gone down, so they are not forced to do a particular deal. If that ratio was much higher, there’d be much more pressure to deploy and much more competition. As the dry powder has gone down, people can afford to be much more selective.”

Stay tuned this week for Secondaries Investor‘s downloadable Full Year 2019 Fundraising Report.