Secondaries funds have more undeployed capital than any other fund strategy when compared to capitalisation, according to a report by advisory firm TorreyCove Capital Partners.
The firm looked at overhang for 2007 to 2015 vintage-year funds of all strategies. Not surprisingly, the buyout strategy represented, on average, the strategy with the largest overhang in absolute terms, at $455 million. The secondaries strategy, on average, had the second highest in absolute terms at $387 million. Early stage venture capital had the lowest at $45 million.
When TorreyCove looked at dry powder as a percentage of capitalisation, secondaries had the highest average overhang, with 42.6 percent of committed capital remaining uncalled. In absolute terms, this represented on average $387 million worth of dry powder compared with an average $909 million-sized fund.
That compares with a 31.63 percent average overhang for buyout. Expansion and late stage funds had the second highest overhang with 35.8 percent of undeployed capital. Distressed debt funds had the lowest, with only 12.8 percent of capital undeployed, according to the report, which surveyed 1,766 funds across 10 strategies.
Bullish public markets have made it difficult for secondaries buyers to put money to work, David Fann, president and chief executive of TorreyCove told Secondaries Investor.
“There’s less pressure to sell,” he said. “For most institutional investors, the bull market has reduced their relative exposure to private equity as a percentage of total assets. As a result, most institutions are underweight private equity.”
Strong initial public offering markets were creating less need for limited partners to sell interests for liquidity, and the use of leverage to enhance returns also meant general partners were reducing the amount of capital drawn down from LPs, according to Fann.
“In general, there will be a buildup of dry powder until the public markets correct,” he said. “Fear of a bear market will catalyse secondary transaction volume.”