The calm after the storm

The flow and pace of transactions this year is looking very different to previous years, reflecting several new dynamics in the secondaries market.

Transaction volume always used to load towards the end of the year. But this year, that fourth-quarter deal flow is looking a bit on the slow side.

“It used to be that 80 percent of total volume was in the fourth quarter,” said a New York-based advisor. ”It’s now more spread out.”

“Historically, 50 percent of our deals occurred in the fourth quarter,” added a partner at a large fund of funds active in secondaries. He noted that the third quarter typically tends to be the least active.

The fourth quarter used to be the busiest time of the year because sellers, particularly pension funds, banks and insurance companies, wanted to lock in deals before the end of the fiscal year.

But in 2015, the flow of transactions was much more constant throughout the year and several market participants told me they had an unusually busy summer. “This year, there was really no seasonality,” the fund of funds manager said. “In fact, things have been quieter in the fourth quarter.”

With strong pricing coming off 2014, sellers were eager to take advantage of high premiums or low single-digit discounts throughout most of the year.

The type of sellers tapping the market has also changed, gravitating more toward secondaries funds and funds of funds managing their portfolios and wanting to sell tail-end funds. These sellers, unlike pension funds or regulated sellers, don’t have as much pressure to lock down a transaction before the end of the fiscal year, making the rush to selling in the fourth quarter less pressing.

“Discretionary sellers are much more relaxed,” said a London-based advisor. “There’s less pressure.”

He noted that deal flow was more spread out through the year due to the increase in the number of GP-led restructurings and other recapitalisations. These types of deals tend to take much longer to close than a traditional limited partner fund stake sale and they’re also more difficult to time.

While these developments may explain why deal flow was more sustained this year, one of the main reasons for the fourth-quarter slowdown in activity is stock-market volatility.

This instability is likely to mean lower NAVs in the third quarter, for the first time in several years. Until those figures come out, market participants, who have put a lot of money to work earlier in the year, seem to prefer to take a breather.

“A lot of them are thinking that maybe the peak has passed and they should hold and see if volatility goes away,” the fund of funds manager said.

If it doesn’t go away, could the whole of 2016 end up looking a lot like the fourth quarter?

What have you noticed about the pace of investments this year, and what does it says about what’s in store for 2016? Send me your notes at marine.c@peimedia.com.