Summer reading

Record levels of dry powder, macroeconomic headwinds and political uncertainty; advisory firms’ mid-year reports make for interesting reading.

It’s the middle of summer for most and while many secondaries market participants are no doubt relaxing on the beach with a good book, at Secondaries Investor we have been busy burying our noses in advisory firms’ mid-year reports.

Here are five themes we pulled out of the papers.

Real assets volume growth took a pause

Recent activity in real estate secondaries, particularly in light of the California Public Employees’ Retirement System’s $3 billion real estate portfolio sale to Strategic Partners last year, appears to have dampened. “The multi-year growth trend in real estate volume took a pause in the first half of 2016,” Greenhill Cogent wrote in its Secondary Market Trends & Outlook report, estimating around $1.5 billion traded during the period. The firm cites a slowdown in large portfolio sales (only four deals larger than $150 million closed in the first half), as well as fewer one-off or opportunistic sellers tapping the market.

The firm described energy secondaries volume as “de minimis” as volatility in commodity prices directly affected buyers’ abilities to underwrite underlying assets.

Dry powder is up, deal volume is down

Firms have record levels of capital to deploy, as much as $105 billion by Credit Suisse’s estimate, which assumes a four-year investment period for closed funds and includes funds in market and 20 percent leverage. Despite this, deal volume fell as much as 23 percent to between $12 billion and $15.7 billion, depending on whose report you look at.

Should we be worried? No, according to Credit Suisse, which wrote in its Secondary Market Update that opportunistic buyers taking advantage of market dislocation may cause a surge of activity toward the final quarter.

“The second half is always traditionally busier than the first half,” said the managing partner at one London-based secondaries firm. “Just wait until everyone gets back from their holidays and things will pick up.”

Venture pricing lagged

“The flight to quality has been particularly pronounced in demand for venture,” Greenhill Cogent wrote. Pricing for VC fund stakes fell to 73 percent of net asset value, the lowest of all strategies and well below the 87 percent average.

Venture still accounted for a third of fund stakes sold by the firm, the second-largest strategy after buyout. While there’s a lot of potential in VC secondaries, as we wrote in mid-July, buyers are being selective as to which companies they’re willing to increase exposure to at this point in the venture cycle, the firm wrote.

LPs are concerned about two main issues post-Brexit

Political risk and currency volatility are playing a more prominent role in investment committees’ discussions after Britain’s decision to leave the EU, according to Credit Suisse. While the bank says it has yet to see any major impact of Brexit on the secondaries market, it believes European limited partners holding dollar fund assets may sell holdings in order to lock in more attractive returns, and US investors may continue to rebalance their portfolios, including European exposure.

Buyers paid more for energy and natural resources stakes

Rising oil prices in Q2 and low bids during Q1 resulted in bids for interests in energy and natural resources funds rising by more than any other strategy, according to NYPPEX Private Markets’ Trends and Outlook Worldwide report. But while average high bids increased by 2.6 percent, buyers bid on average 89.7 percent of NAV, the lowest of all strategies.

Greenhill Cogent expects sectors – like energy – that have experienced particular volatility will account for a growing portion of the GP-led market in the second half and into 2017, as sellers take advantage of recovering prices and industry dynamics to adjust their exposure.

“As fund lives continue to lengthen and LPs desire liquidity, there is no slowdown in this part of the market,” the firm wrote.

If you are reading on the beach, what’s on your summer reading list? Let me know: adam.l@peimedia.com