What mid-year reports tell us about the secondaries market

It’s the time of year that advisory firms’ mid-year reports and outlooks are starting to pop up in email inboxes. While a number of similar trends may be apparent when confirming the reports’ statistics – a number of details are quite different.

For example, Setter Capital found there were $20.6 billion in total secondaries transactions in the first half of 2015, compared with $18.7 billion according to NYPPEX and $15 billion according to Greenhill Cogent.

One thing to note is that Setter and NYPPEX both include hedge fund and timber secondaries in their tally, but at less than half a million in hedge fund transactions, according to Setter, that only explains a tiny fraction of the difference. Greenhill Cogent bundles infrastructure in with private equity, so to compare like with like, we’ll add infrastructure to Setter’s figures.

If you break down the volume for private equity and real estate only, the two largest sub-asset classes, here’s what the numbers look like:

• According to Setter, there were $17.1 billion of private equity transactions, including infrastructure, and $2.9 billion of real estate transactions.
• According to Greenhill Cogent, there were $12 billion of private equity transactions, which also include infrastructure deals, and $3 billion of real estate transactions.
• NYPPEX doesn’t break down its $18.7 billion figure by sub-asset classes.

Here’s how the full-year estimates are shaping up:

• Setter anticipates there will be $38 billion of private equity transactions, (adding infrastructure), and $6.5 billion of real estate transactions.
• Greenhill Cogent estimates there will be $31 billion of private equity transactions, including infrastructure, and $9 billion of real estate transactions.

Meanwhile, NYPPEX doesn’t break down its $18.7 billion figure by sub-asset classes. Its number is based on gross cash proceeds of transactions and uncalled commitments for closed deals in buyout, mezzanine, venture capital, fund of funds, energy, natural resources, distressed debt, real estate and hedge funds.

While Setter and Cogent agree on real estate volume in the first half, there’s a $5 billion gap between the two figures for private equity – which grows wider still when you look at full-year estimates. Some of that is likely to do with methodology.

Cogent takes into account the purchase price and unfunded capital in the transaction value while Setter looks at net asset value and unfunded capital. Both look at their own deal flow and survey market participants to arrive at their figures, which necessarily include approximations – despite the market starting to be a bit more transparent, they simply can’t accurately track all market activity.

“It’s still a private market at the end of the day. Some sellers are very discreet,” said a partner at a large secondaries firm.

“The reality is that they have to make big estimates,” for these reports, he continued. “They request we report our deals, but sometimes we don’t talk to them … When they don’t speak to a group, they have to estimate and that’s just a guess, often.” He said his firm did a half-billion-dollar transaction with a sovereign wealth fund that was never reported, for example. “That’s a big swing,” he added.

One LP cautioned these reports ought to be taken with a grain of salt: “People use these reports to help their own interest,” he said. “They might say the numbers are massive and it’s a right time to sell or that they are low and so you should sell and you’ll get a lot of attention.”

But yet another noted that given the opacity of the secondaries market, any and all data is welcome to help paint a fuller picture of market activity and trends, even if imperfect.

Despite their differences, what these reports are telling us is that it will be another strong year for activity in the now-vibrant secondaries market, although the jury’s out on whether transaction volume will be slightly up or slightly down for 2015.

Based on your deal flow, past and projected, tell us your predictions for 2015 by writing to marine.c@peimedia.com.