Fewer buyers sought IRRs of above 15% last year compared with a year earlier, a survey by advisory firm Cebile Capital has found.
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While more aggressive financing structures such as payment-in-kind notes may be off the table, deals are ongoing, experts say.
The majority of secondaries and fund of funds respondents to a recent survey by Investec said that while they use debt, they don’t need it to be competitive.
Using debt to acquire portfolios changes the nature of secondaries investments, according to the head of the firm’s fund investments team.
High levels of dry powder and high pricing in the secondaries market is forcing firms to use leverage and chase staple deals to make purchases attractive.
The firm estimates there is about $55bn of dry powder in the secondaries market, up from $49bn a year earlier.
Leveraging a portfolio for liquidity can be similar to refinancing a property, but what effect does this have on the secondaries market?
Secondaries firms are now broadening their view of leverage and considering its use to boost returns through dividend recaps and help minimise currency volatility.
To maintain the best returns possible, and be able to complete some of the larger transactions taking place today, secondaries firms have been increasingly using leverage.
While the secondaries market is providing a convenient avenue for limited partners to sell fund stakes and access to liquidity, alternatives such as preferred equity have become welcomed opportunities for LPs looking to preserve portfolio upside, explains Pierre-Antoine de Selancy, managing partner and co-founder of London-based 17Capital.