News & Analysis

UBS: secondaries buyers lowered return targets

Several factors including higher pricing lowered buyers’ targeted returns, according to a survey of market participants by the Swiss investment bank.

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Returns expectations have gotten lower, according to a survey recently conducted by UBS’s secondaries advisory arm.

“Over a third of our survey respondents stated they had lowered their targeted buyout return hurdles in 2013 from the prior year,” said Philip Tsai, UBS’ global head of secondaries market advisory activities. “For dedicated secondary buyers, we have seen targeted returns gravitating towards approximately a 1.5x gross multiple and mid-teens gross IRR for buyout interests.”

The survey found investors targeting gross multiples between 1.5x to 2x dropped to 70 percent of the 80 survey respondents from 82 percent in 2012; it also found the amount of surveyed respondents targeting gross IRRs between 17.5 and 25 percent dropped to 62 percent last year from 79 percent in 2012.

Tsai said that high pricing, the increase of dedicated and non-dedicated buyers and a willingness of auction participants to re-bid was making the market more biased towards sellers.

“The two variables to price are your cost of capital, what you underwrite to, and how aggressive or conservative you are in projecting the cash flows, or forecasting,” he said. “In years past, buyers have stated similar levels of targeted returns: holding the cost of capital constant but having a more aggressive forecast on cash flows will still result in higher prices being paid.”

Tsai Philip
UBS global head of secondaries advisory Philip Tsai

UBS said the effect of high pricing was turning dedicated secondaries buyers into selective sellers, causing buyers to accept most terms and conditions, and is subsequently drawing an “influx of leverage providers into the market”.

In 2006-7, he said, there were only really two main leverage providers to secondaries buyers. “Today, that number has jumped to at least six active leverage providers,” he said. “It feels like the adoption of using leverage in the secondary market is growing in order for bidders to remain competitive.”

UBS recently advised on the $1.2 billion UniCredit spin-out as well as the $1.1 billion sale of 24 fund interests from the Irish National Pensions Reserve Fund to Lexington Partners.