The market for small- and medium-sized transactions is picking up, writes Lars Lindqvist, founder and chief executive of London-based broker Cattegatt.
Large portfolio auctions and restructurings are often the focus of discussions about the secondaries market – but smaller transactions abound and are becoming increasingly prevalent, particularly in the US.
Buy-side investors are interested in smaller interests for a number of reasons. For example, the large amount of dry powder available makes buyers keen to consider smaller interests. The more esoteric interests are attractive because they draw less competition.
On the sell-side, trends differ by region.
In the US, smaller institutions, family offices, endowments and private banks make up the lion’s share of those disposing of small-and medium-sized portfolios; with the assets being sold a combination of single funds and baskets. The most common reason for selling in this section of the market is for portfolio management, disposing of those managers they are less keen on. This “housekeeping” could consist of just one fund or several. If LPs sell several funds in a basket transaction they can often command a better price due to scale and capital deployment efficiency for buyers. In some cases it may make more sense, if an LP has made a conscious decision to rebalance, to make a basket offer. The growing number of LPs rebalancing their portfolios is testament to the US market’s maturity.
The US secondaries market is often driven by different factors compared to its European counterpart. For the most part, transaction sizes in the US have remained relatively static, although LPs are using the secondaries market more now than ever before. The market today exhibits a greater level of sophistication and participants are increasingly aware of how to use the secondaries market for portfolio management efficiency. The greater number of market participants is creating better placing power and competition. This is motivating sellers, as they are increasingly able to retrieve more attractive prices for their assets.
In Europe, transaction sizes have changed remarkably, as banks offload assets because of regulatory pressures, which has been the main driver. Banks are shoring up their balance sheets and improving their capital adequacy ratios. As a result there are far fewer small-and medium-sized transactions in Europe. European investors are, however, increasingly learning to use this market for “housekeeping” similar to the US. The type of sales currently being seen in Europe are evidence of an acceleration of market evolution and awareness.
Interestingly, we have also seen increased activity from Asia, led by a number of key drivers, each of which is regionally specific. The main driver of secondaries transactions with Chinese exposure is investor concern over the slowdown in the Chinese economy. In India, policy issues have contributed most to the rise in deal flow, while in Japan, portfolio management, as well as upcoming regulatory constraints, are contributing factors.
The Asian private equity market, meanwhile, is significantly smaller than the US and Europe. Therefore secondaries dealflow is less yet more opportunistic. While there are only a handful of dedicated Asia-Pacific secondaries players in the market, the activities seen in the US and Europe over the past few years have created an awareness among non-traditional buyers, for example sovereign wealth funds and family offices.
All of this points to an expected increase in dealflow – but they won’t necessarily be ‘big’ deals.
Lars Lindqvist is the founder and chief executive of London-based broker Cattegatt.