UBS on $45bn in dry powder

Rodney Reid, UBS’ head of secondaries advisory for EMENA, discusses trends shaping the market this year.

How would you characterise the secondaries market at the start of 2014?

Despite a sluggish start to 2013, last year finished on a very positive note with several large and prominent transactions getting done. Our sense is that the strength of the second half of 2013 seems to have carried over into 2014. No doubt a contributing factor to 2014’s good start is the significant amount of dry powder available for deals. Our estimation at the beginning of 2013 was that there was approximately $43 billion of dry powder available among the dedicated secondaries buyers, but going into 2014 that figure had risen to over $45 billion. When you add in the many non-dedicated groups, such as sovereign wealth funds, who opportunistically look at buying, the amount of potential dry powder available is quite substantial. All that capital chasing a finite number of deals creates interesting supply and demand dynamics.

So what is the investor appetite for secondaries?

I would say investor appetite for secondaries continues to be robust, as evidence by the fundraising success of several large secondary buyers. There are over 30 secondary buyers seeking to raise around $25 billion in 2014. The rapidity with which some secondaries funds have been able to raise capital is stunning; however, I have been equally impressed by the persistent interest shown by traditional LPs in acquiring secondaries themselves. LPs, who might have historically only invested through secondaries players, are increasingly choosing to acquire secondaries directly, which is adding to the overall level of competition. With the increased competition, it is no surprise that secondary buyers’ success rate declined by roughly one third in 2013.

How widespread are secondaries?

The scope of secondary buyers has extended beyond buyout and venture funds to include direct investments, tail-end portfolios, hedge funds, and real estate portfolios. Partly a function of increased competition for typical buyout and venture portfolios, secondary buyers are actively exploring additional avenues to put their capital to work. Historically, inconsistent supply and target return misalignment prevented secondary buyers from deviating too far from buyout and venture portfolios; however, nowadays with more consistent deal flow, fund types like infrastructure and fund of funds are attracting more attention from secondary buyers. For these deals types of deals, many secondary buyers are using separate accounts, and some buyers have gone so far as to raise dedicated funds to mitigate any return misalignment. General partners are also taking advantage of the widening breath of the secondary market to generate liquidity for their LPs.

Based on the 2014 UBS Secondary Market Buyer Survey, we estimate approximately 30 percent of secondary buyers participated in general partner-led portfolio liquidity solutions in 2013, for which nearly $3 billion of net asset value was acquired. In addition, well-regarded general partners are even turning to the secondaries market to access capital in the form of staples that can kick-start or top-up a traditional primary fundraise.

How do you see the secondaries market developing this year?

I do not anticipate the high level of competition in the secondaries market to abate in the near term, so I would expect buyers to continue their search for less competitive situations to invest in. It would not surprise me to see a continued increase in the alternative asset classes; infrastructure, hedge fund, real estate, and GP-led transactions. Secondaries buyers are also casting a wider net to fish for credit, intellectual property, healthcare royalties, and other sorts of illiquid assets. This year I expect more sellers to take advantage of the attractive market conditions to optimize their existing portfolios. With increasing sellers selectively pruning their non-core GP relationships there could be an increase in the number of secondaries transactions but also a decline in average deal sizes.