Secondaries have a spring in their step

Spirits are high in the European secondaries market despite some jitters around dry powder.

Secondaries Investor recently visited Switzerland, where spring was beginning to bloom. The mood of secondaries professionals there was appropriately optimistic, reflecting an industry with plenty of firepower and growing confidence in how to use it.

The numbers speak for themselves. Since the dawn of 2018, Lexington Partners and Coller Capital have returned to market seeking a combined $21 billion. Earlier this week Secondaries Investor revealed that Intermediate Capital Group is back, targeting $1.6 billion for end-of-life restructurings. And these are by no means rare birds, with several big names planning to return with larger-than-ever funds before the year is out.

All will have done their pre-marketing; all will have the conviction that the amount they are targeting chimes with what investors are willing to commit. According to Greenhill Cogent, there is around $125 billion of dry powder ready to be splurged, including leverage. In the words of one managing director at a Swiss-headquartered firm: “That’s only two or three years’ worth of deals. If it was four or five I might be worried.”

But there is still some wariness, particularly for those reticent about doing more complex deals or layering on leverage. Pricing on LP stake sales is high, with discounts hard to find outside of less developed markets. Two firms we spoke to in Switzerland cited Eastern Europe as a place where good assets can – occasionally –  still be bought at a discount.

Though more efficient pricing is an inevitable consequence of the market’s growing maturity, it is weighing on returns and causing some firms to consider contingency plans.

One Zurich-based managing director at another firm, which incorporates primary and co-investment pockets into its secondaries funds, said that if prices stay at current levels, they will make maximum use of those pockets and increase their size in new funds. The firm is increasingly looking at secondaries opportunities outside Europe and North America, as well as asset classes such as real estate and venture capital to drive returns.

Talk of a fundraising bonanza is also affecting the work of placement agents in positive and negative ways. It’s a lot of fun to help well-established names raise record amounts of capital for a booming strategy. But according to one placement agent, the success of these firms can make it hard to manage the expectations of newer, less differentiated or less illustrious teams that can get an unpleasant shock when the money doesn’t flow in as expected.

But let’s accentuate the positive. LPs continue to show a desire for secondaries, and based on our conversations in Switzerland, a growing understanding of what differentiates a restructuring expert from a purchaser of portfolios or a buyer of directs from a small secondaries specialist. As the market continues to mature, that is cause for genuine optimism.

Is the growing amount of secondaries dry powder affecting the way you think about investing? Let us know: