Opportunistic sellers are adding younger vintage funds to bundles of older and less desirable funds to achieve higher pricing for their portfolio sales, according to a report by Greenhill Cogent.
Supply of 2009 and newer vintage funds increased by almost a third in the first half of 2016 compared with 2015 with buyers competing for funds which they perceive as having more remaining upside, according to the investment bank’s Secondary Market Trends & Outlook, July 2016 report.
“Increased market uncertainty influenced buyers to focus on the funds for which they have the greatest underwriting conviction, which resulted in a large number of buyers aggressively competing for certain assets and limited demand for others,” the firm wrote in its report. This trend was particularly pronounced in the first quarter when US public market volatility spiked, the report noted.
Average pricing for 2009-vintage and newer funds priced at par with net asset value during the period and received over 40 percent more bids than older funds. Pre-2009 vintage buyout funds priced at 93 percent of NAV.
With the limited supply of younger, higher-quality funds, the firm expects the mismatch between these and older, lower quality funds to continue in the medium term.
Average pricing for all funds dropped slightly to 87 percent of NAV in the first half of 2016, down from 90 percent last year. Buyout was the only strategy not to fall, with pricing stabilising at 94 percent of NAV, unchanged from 2015.
The flight to quality was particularly pronounced for venture funds, the report noted. While VC funds still accounted for a third of fund stakes sold by Greenhill Cogent – the second-largest strategy after buyout – pricing for venture stakes fell to 73 percent of NAV, the lowest of all strategies. This was due to buyers being selective as to which companies they were willing to increase exposure to at this point in the venture cycle, according to the report.
Disagreement between buyers and sellers over the potential upside of exposure to unicorn companies in a fund – as much as 50 percent of the fund’s NAV in some cases – added to the softening in demand for VC stakes, the report noted.
“Dedicated secondaries buyers generally value diversification and have thus been cautious participants in this segment of the market,” the firm wrote.