Increased competition, innovative structures and the use of leverage have caused the trading of secondary interests to be more efficient in H1 2014 with improved processes, whilst offering better prices to vendors.
That’s according to a report from Cattegatt Secondaries, a specialist broker for private equity and illiquid hedge fund assets.
Over the same period, the majority of deal flow continued to be originated in Europe and the US, but significantly there has been increased activity from Asia.
Deal flow in the US has been caused largely by portfolio rebalancing, with LPs consolidating their exposures into their preferred GPs and disposing of the ones less prioritised. In Europe however, supply continued to be driven by regulatory changes resulting in large basket disposals from financial institutions. Competition has intensified not only for the mega balance sheet disposals but also for smaller bite size deals, in order for investors to be able to deploy capital.
As a result of the increased deal flow and heightened focus on the secondary market, investors have become more concerned about their private equity portfolio management. As a result, the secondaries market has become increasingly institutionalised; currently half of the LPs Cattegatt speak to state they are likely to use the market over the next three to five years, compared with around a quarter two years ago, in order to optimise their books.
In 2013, secondaries private equity funds raised more than USD15bn and there is currently a total of approximately USD50bn of dry powder in search of assets. The increasing number of new entrants to the market with lower return targets, such as pension funds, insurance companies and family offices, have created an increasingly competitive environment. As a result, it is an attractive market for sellers.
Cattegatt, which specialises in small to medium deals, says the large number of interested buyers in the market offer sellers not only a favourable price discovery climate, but also attractive pricing for a wide spectrum of assets. Price levels are increasingly competitive, not only for the classic brand name private equity funds, but also for more differentiated strategies such as infrastructure, real estate and venture capital. Price levels for the well-known buyout funds are currently being seen at around 90 per cent to premium levels, with upfront payments and swift transaction processes being the standard in order to entice sellers.
A Cattegatt sell side survey shows that a key reason for using a specialist broker in the secondary market is to offload a time consuming, complex and at times sensitive process.