The view from London in 2016

Tail-end opportunities, the beauty of volatility and the proliferation of GP-led transactions were among the topics broached at an industry event in London this week.

Tail-end opportunities, the beauty of volatility and the proliferation of GP-led transactions were among the topics broached at an industry event in London this week.

Secondaries professionals gathered in London this week for a morning of panel discussions sponsored by the British Private Equity & Venture Capital Association (BVCA).

Many of the issues debated were perennial ones. For example, there was grumbling that GPs were still withholding consent on deals, creating headaches for buyers and stymieing deals. Legal documents still haven’t caught up with the needs of a secondaries market they were never designed to accommodate, delegates complained. And there was talk of the need to use leverage prudently, another recurring topic at such gatherings.

But there were also some ‘newer’ themes based on today’s market dynamics that had delegates buzzing. Here are a few takeaways:

1. The tail-end is your friend

Tail-end portfolio sales were a topic on everyone’s lips. Last year, more than 60 percent of buyout fund stakes sold were from six to nine years old; that’s a big change from five years ago, when funds that old only comprised 16 percent of transaction volume, according to Greenhill Cogent’s latest market report. While picking up stakes in tail-end funds – or doing directs for the assets left lingering – isn’t a strategy that all buyers are comfortable with, it’s one that’s expected to gain more ground.

2. A bit of volatility can be good

Volatility in public equities is good for the secondaries market as it pushes sellers and potential sellers to dispose of stakes in the belief pricing may be at its peak. Prices have certainly slipped, with average pricing for LP stakes falling to 88 percent of net asset value (NAV) in the second half of 2015, down from 92 percent a year earlier, according to Greenhill Cogent.

One participant said never-before sellers had approached his firm to test the waters and see what sort of pricing they could obtain. Meanwhile, some buyers are expecting the proverbial denominator effect to rear its head and drive additional dealflow, as it has done in previous cycles.

“A little volatility is a net positive for us buyers,” said one participant.

3. Fund recaps are set to continue

GP-led deals, which include restructurings, recapitalisations and tender offers, among others, are not only set to continue, they’ll start to be seen in various private equity strategies and other asset classes like private debt, infrastructure and real estate. With $8.2 billion transacted in real estate secondaries in 2015, according to Landmark Partners, and with last year’s record $3 billion real estate deal between the California Public Employees’ Retirement System (CalPERS) and Strategic Partners, participants agreed real estate fund restructurings were set to rise.

4. Volume drives LP disposals

Large institutional investors such as sovereign wealth funds and public pensions which are looking to sell portfolios of stakes take comfort in the high volumes of dealflow. With around $42 billion traded on the secondaries market in 2015 according to Evercore’s 2015 Secondary Market Survey, these large sellers are increasingly being enticed by the market’s ability to provide liquidity for their large portfolios, as well as deliver high prices.

One participant even went as far as to say it isn’t pricing but volume that is enticing sovereign wealths and public pensions to sell.

“Ten years ago it could take up to one year to sell a portfolio,” the participant said. “Today if you want to sell $1 billion, you can sell it in three months. That is changing the view of sellers in the market right now.”

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