UBS: leverage and deferred payments on the rise

The number of leverage providers in secondaries has more than doubled over the last four years, according to the report obtained exclusively by Secondaries Investor.

The use of leverage and deferred payments is increasing as buyers seek to enhance returns in an increasingly competitive environment, according to a survey conducted by UBS Private Funds Group and seen by Secondaries Investor.

The UBS 2017 Secondary Market Survey and Outlook found that 35 percent of buyers have used deal acquisition leverage. Of these, 67 percent used a fund facility and 33 percent a special purpose vehicle. This proportion was even higher among the largest players, with seven of the top 10 secondaries buyers having used leverage to enhance returns.

The number of leverage providers has fuelled this growth, with around 13 providers last year compared with around six in 2013.

The use of deferred payment structures as a deal sweetener continued last year. Of the respondents, 58 percent indicated that their average deferred portion of purchase was between 40-60 percent, with 8 percent citing 60 percent-plus. The average period of deferral was slightly down on 2015. In 2015, 44 percent said their average deferral length was 13 months or more. In 2016, this figure was just 29 percent.

The use of leverage and deferred payments comes against a backdrop of decreasing returns in a highly competitive environment. According to the survey, target returns are at historical lows after three years of steady decline. For LP transactions in 2016, 51 percent of buyers have a target gross internal rate of return of between 12.5-17.4 percent. This figure was 22 percent in 2014.

Some of the drivers behind lower anticipated returns include an increase in dedicated dry powder for secondaries, which hit $71 billion including leverage, as well as more aggressive competition among buyers, according to the report.