Sister publication Private Equity International recently sat down with some of the secondaries market’s top participants for a roundtable discussion in New York. In this first excerpt, Ardian’s Vladimir Colas, Partners Group’s Adam Howarth, Debevoise & Plimpton’s Kate Ashton, HarbourVest Partners’ Jeff Keay and Greenhill Cogent’s Bill Murphy (above L-R) discuss their expectations for 2017 deal volume and innovation in transaction type.
The secondaries market has remained on a healthy footing in the last 12 months, and despite heightened geopolitical uncertainty in several parts of the world – including the two main markets, the US and the UK – it has been business as usual.
That was the consensus among five top secondaries professionals sister publication Private Equity International brought together in the New York offices of Debevoise & Plimpton at the end of March.
“There has been a stream of auctions, intermediated processes where sellers are coming to market to rebalance their portfolios, and then in addition we’ve seen more creative structured deals of very different types,” says Kate Ashton, a corporate partner at Debevoise. “It’s been broad.”
Transaction volume slightly dipped to $37 billion in 2016 from $40 billion the previous year, according to data from Greenhill Cogent, but this is no cause for concern, according to our roundtable contributors. Volume has remained in the same range during the past few years, and they anticipate it will pick up in 2017.
“I would expect volume will be up over last year if no meaningful dislocation happens this year,” says Bill Murphy, a managing director at Greenhill Cogent.
Some market participants have been more worried about dwindling returns.
“We’ve been in a long bull run with very positive returns but you see the same assets for sale year after year,” says Adam Howarth, managing director and co-head of private equity secondaries at Partners Group.
“People are buying the same assets but with another year juiced out of that lemon, if you will. There’s only limited upside and with the demand that’s out there, it puts pressure on pricing and then pushes down returns.”
Last year was a record-breaking one for the secondaries market, with 23 vehicles amassing $33.9 billion to deploy across private equity, real estate and infrastructure, adding to the dry powder in the sub-asset class, according to PEI data.
To maintain returns, secondaries have focused on seeking more creative ways to find attractive deals in a mature market that has become quite efficient, whether it has been by sourcing and structuring their own deals or by increasing their use of leverage.
“In many cases, it’s more about searching on the fringes of the return frontier to attractive opportunities that are still incremental to your portfolio returns without taking on more risk to do those,” says Howarth.
“You see it in take-privates, you see it in secondaries directs. It could be in emerging markets. It could be a GP-led transaction. It’s all those things where buyers are now looking to differentiate themselves in terms of how they’re positioned and how they invest their clients’ money.”
An example of that type of transaction was the headline-grabbing £1 billion ($1.3 billion; €1.2 billion) take-private acquisition of SVG Capital by HarbourVest Partners in the autumn.
HarbourVest had kept an eye on SVG for several quarters before it ultimately pursued the opportunity, allowing it to be familiar with the London-listed firm’s assets. It had also closed similar transactions in the past, including the acquisition of Conversus Capital in 2012, and knew how to handle such a public transaction and to move quickly.
“SVG was a classic example of a non-traditional deal where you’re not taking incremental risk because the assets are the same assets you’ve seen trade in a very traditional vanilla portfolio,” says Jeff Keay, a managing director at HarbourVest. “But the way in which that transaction was put together and ultimately culminated was anything but traditional. We thought we had a technology and an experience set very differentiated from the rest of the market, and we used that to our advantage to be able to secure it.”
Ashton, who worked on the transaction, says the deal was also complicated from a legal standpoint and took a lot of planning. “It was a secondaries acquisition played out in a somewhat different way than anyone would have expected,” she says. “It’s not going to be often that situations like that occur.”
Stay tuned for the second excerpt of PEI’s secondaries roundtable which will be published on Secondaries Investor later this month.