Younger portfolios of private fund stakes are increasingly coming to market as potential sellers attempt to take advantage of high pricing conditions, according to Partners Group‘s latest outlook report.
The Switzerland-headquartered investment firm is focused on buying what it calls “inflection assets” – typically two-to-five years old with high remaining value creation potential, high visibility into underlying investments and no J-curve effect, it noted in its 2020 Private Markets Navigator published on Tuesday.
Types of assets include diversified portfolios of fund interests, high-quality buyout funds in developed markets, all of which are managed by leading general partners.
Pre-crisis vintage funds still account for the bulk of secondaries market dealflow, with 38 percent of funds by number in the first half of this year of 2008-vintage or younger, according to Greenhill’s Global Secondary Market Trends & Outlook July 2019. By weighted average NAV, such funds accounted for 62 percent of volume.
“There are more inflection assets coming to market as the 2006-07 vintage buyout funds have very little content remaining, and a lot of that content is public or tail-end which doesn’t price well,” Anthony Shontz, managing director and co-head of private equity integrated investments Americas, told Secondaries Investor. “If sellers want to achieve pricing anywhere near NAV they can’t sell these old assets and so they are shifting to sell more recent funds.”
The firm expects that by 2023 such assets will account for 85 percent of total annual deal volume, estimated at $90 billion.Inflection assets are less dependent on near-term exits, typically have more assets held at cost in their portfolios which creates more value creation potential, and are less prone to adverse public market developments as they have less public exposure, Partners Group noted.
A spike in primary fundraising is also causing the influx of inflection assets in the market, Shontz added.
Primary fundraising last year exceeded $450 billion, around more than 2.6x that of one decade ago, and with annual secondaries deal volume accounting for around 3.5 percent of primary capital raised over the last five years, the “robust fundraising environment from 2014-18 is leading to a flood of inflection assets available in the secondary market”, he said.