Three spaces to watch in the market at year’s end

As we approach the end of 2023, here are three areas to keep an eye on – and yes, they all relate to the secondaries market's capitalisation.

If you’re reading this, it’s likely 1 December and the end of the year is officially upon us.

For buyers, this typically means trying to wrap up deals before the end of the year; for advisers, you’re either absolutely slammed or trying to plan for Q1 deal launches. For the legal community, it likely means 30 days of twiddling thumbs before it hits 6pm on New Year’s Eve and every client and their dog wants to close a deal before midnight.

As we approach the holiday season, here are three observations on the state of the market based on interactions Secondaries Investor has had with market participant in recent weeks.

Show me the money

The biggest concern in people’s minds revolves around the perceived lack of capital in the market. We touched on this topic a few weeks ago when we mentioned that the primary buyout market has enough capital for 1.68 years of deployment, compared with just over two years’ worth in the secondaries market. Capital overhang figures in secondaries typically include near-term future fundraising capital and a certain level of debt, whereas figures for the buyout market typically do not, we’re told.

Calculating the real capital overhang ratio for secondaries can be tricky. Yann Robard, founder of Whitehorse Liquidity Partners, tells Secondaries Investor the figure is closer to between six months to one year of dry powder. Data shared at a press briefing by one of the market’s biggest buyers in London this week put the figure at 1.2 years’ worth of dry powder.

Whatever the true figure, it’s clear that many in the industry think there is not enough capital to back the deals coming to market (the buyer above said they see around $200 billion in dealflow each year) and that this is stifling its growth.

The insurers are coming

AXA Group, Amundi Asset Management and Allianz are all examples of insurance groups that have made headway with building out their secondaries buyside capabilities this year. AXA Investment Managers Prime, the insurer’s private markets and hedge fund-focused unit, hired a former Northleaf Capital Partners investment professional this week to lead its private equity secondaries business, as Secondaries Investor reported. Amundi has tapped a former Montana Capital Partners executive as a managing director for secondaries, while Allianz Global Investors has made headway across multiple strategies can invest in PE, infra and credit secondaries.

As insurers face potentially higher claims payouts and increased reinsurance costs, they’re seeking ways to grow their AUM, and secondaries are an efficient and diversified way to do that, an adviser pointed out to me over coffee this week.

More secondaries capital from insurance-related groups won’t be the silver bullet to better capitalising the market overnight; they will incrementally help grow the pie.

Look north and east

What has got folks excited is the potential that huge sovereign wealth funds such as those in Norway, the Gulf, in Southeast Asia and East Asia could pose. Some, like Abu Dhabi Investment Authority and Mubadala Capital have been actively backing secondaries strategies over the past year via fund commitments, co-investments and joint ventures, to the tune of several billions of dollars.

Others have miniscule or zero exposure to alternatives. Japan’s Government Pension Investment Fund has just 0.22 percent of its roughly $1.5 trillion total AUM exposed to private equity and could clearly be a much larger player in the asset class. Norway’s giant sovereign fund this week wrote to its country’s Ministry of Finance recommending that it be allowed to invest in private equity.

With the equivalent of almost $1.5 trillion in assets, a 10 percent allocation to PE would translate to around $150 billion invested for Norway’s Government Pension Fund Global. At some point, this exposure is going to drip down into the secondaries market – something that should give succour to anyone wondering where the next sources of mega-dealflow will come from.

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