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TorreyCove downgrades tactical rating for secondaries

TorreyCove recommends a ‘strong underweight’ allocation to secondaries.

TorreyCove Capital Partners has downgraded its secondaries allocation rating from ‘moderately underweight’ to ‘strong underweight’, according to the firm’s 2015 private equity outlook report.

“After blowing past all previous years in 2014, there is good reason to think that the growth in secondary deal volume will moderate, and possibly decline, in 2015,” the report stated.

Unfavourable secondaries market conditions include low-cost competitors, the absence of allocation pressure, extension of Volcker Rule compliance, strong primary market performance and distributions, increasing seller sophistication and lack of selling pressure.

Competition has increased from public pensions and insurance companies, which made up roughly 35 percent of secondaries buyers last year, TorreyCove explained, citing Sixpoint Partners.

Meanwhile, existing favourable secondaries market conditions include the likely increase in opportunistic selling, portfolio rationalisation by limited partners and the growth of general partner restructuring opportunities.

About 20 percent of secondaries deal flow was GP-driven, according to a survey conducted by Sixpoint and about 17 percent of the total dollar value in secondaries deals had a GP as a seller, according to Cogent Partners.

TorreyCove expects secondaries pricing to maintain at or above current levels, unless there is a liquidity crisis from a decline in public equity performance.

“The present environment is one wherein secondary strategies have very little pricing power, and consequently little power over the profitability of their trades,” the report disclosed.

TorreyCove doesn’t expect the market environment to change appreciably this year, therefore “the performance of secondary strategies will be challenged”.