Secondaries pricing recovers sharply in H2

Bids in the secondaries market increased in the second half of 2009 as the public equity markets recovered and traditional secondaries players like Coller Capital and Lexington Partners came back to the table.

Pricing in the secondaries market recovered in the second half of 2009, with the average bid price at about 72 percent of net asset value, up from 39.6 percent in the first half of the year, according to new research from Cogent Partners.

“As pricing levels in the public market recovered throughout the year, secondary market pricing levels for limited partnership interests also recovered, tempered a bit by an increased awareness of the illiquidity discount buyers once again exerted,” Cogent said in a pricing trends report it issued recently.

“Ironically, the quick recovery in the public markets also tempered institutional investors’ liquidity needs, resulting in a much lower level of overall transaction volume than originally projected by many market participants,” according to the report.

Cogent estimates that about $6 billion of actual transactions took place in all of 2009, a significant drop from the $15 billion of deals in 2008.

In the first half of 2009, a new group of buyers entered the secondaries market as more traditional buyers pulled out. “No one wanted to catch a falling knife,” Todd Miller, managing director with Cogent, told PEO in an interview.

New buyers were institutions like pensions and endowments new to the secondaries market, or even new to the private equity asset class, Miller said. “Many of them had not bought a secondaries interest before,” Miller said.

The market stabilised in the second half of 2009, and the more traditional buyers “became more comfortable with valuations, and where things were going”, Miller said.

Also, sellers in the market last year changed over time. In the beginning of 2009, sellers were generally distressed institutions that needed liquidity or were dealing with over-allocation issues. In the second half of the year, as pressure on LPs was relieved by a lack of deals and capital calls, sellers became LPs looking to “actively manage their portfolios”, Miller said.

So far, the secondaries market in 2010 has a sense of “optimism”, Miller said. “People are really interested in seeing where the year-end valuations come in and sell off of that.”