Secondaries: Choice cuts

When Ardian International reached a $9 billion final close on it latest secondaries fund in April, eclipsing the $8 billion it accumulated two years earlier, it rounded off a fruitful 12 months for fundraising.

Since the beginning of last year, HarbourVest Partners, Hamilton Lane, AlpInvest Partners, Portfolio Advisors, Auda International and Pomona Capital have all closed funds. According to Preqin, secondaries fundraising reached $24 billion last year. It is largest annual total since before the global financial crisis.

The spike in activity suggests a resurgence of interest in the secondary market and it begs the question what is driving the demand.

"Based on our estimates, dedicated secondary funds and fund-of-funds have $65 billion worth of dry powder. This is a historic high and is a significant driver for current levels of market activity," says Dominik Woessner, a director with secondaries advisory Cogent Partners in Shanghai. "We estimate that the market will have completed $10-15 billion of transactions during the first six months of this year. This compares to $7 billion during the first six months of last year."

Driving factors

Deal flow has been driven by two factors. Traditionally, the market has been dominated by heavily discounted sales of underperforming funds. However, some observe that this is less of a factor as the industry matures and becomes more diversified, with large LPs dipping into the secondaries market to rebalance their portfolios on a year-to-year basis.

The other factor is the impact of regulation on institutional investors - particularly banks - as they look to de-risk their portfolio in response to new legislation. This is not a new story. The Volcker Rule was introduced in 2012 to put a cap on banks' private equity exposure. Some reacted by selling assets straight away, but others held on for a clarification of the rules. However, with recent announcements, this is likely to change.

"There is fresh impetus," says Tim Flower, managing director and head of Asia secondaries at HarbourVest. "There was a clarification over the Volcker rule timing late last year and there has been a direct reaction. That is one of the reasons his year has been pretty strong."

Not everyone agrees with this view. Banks are the only ones directly affected by Volcker and, while they make up a substantial group of sellers, they do not drive the market. "It is certainly one of the drivers but I would not say it is the main driver," says Woessner. "Banks are among the sellers but they are not the largest group."

Financial institutions account for 33% of transaction volume. Alongside funds, groups of multiple sellers and public pension funds, they make up 76% of the market. The rest comes from endowments, corporations and family offices.

Another way of looking secondary deal flow is in terms of geography. Hiro Mizuno, partner and head of Asia at Coller Capital, observes that where once positions in Asia-focused funds were excluded from global portfolio sales, now they are often included. This can be linked to the perception that Asia has failed to deliver the risk-adjusted return LPs were expecting.

"If you look back to the deals from 2010-2012, a lot of folks have gotten burned and they have not seen the liquidity," says Tom Kerr, managing director and head of the secondary team at Hamilton Lane. "There have obviously been some issues with getting liquidity in Asian funds and, as a result, there is bit of a premium being put on this liquidity today in terms of discount."

However, this does not necessarily translate into secondary deal flow because Asia continues to make up a relatively small part of the market. It accounts for just 16% of global asset sales together with other emerging markets versus 26% and 58% in Europe and the US, respectively.

"There is just not as much trading activity," adds Kerr. "Where you do see positions available, the discounts associated with those positions - from the perspective of buyers - are larger than the sellers want to take, so that dampens activity."

Mixed fortunes

While increased fundraising activity is indicative of a maturing market globally, the rising tide has not floated all boats. Paul Capital and Greenpark Capital are the two high-profile casualties.

"The money is getting concentrated in fewer hands and so a couple of platforms have struggled," says HabourVest's Flower. "It has not been easy for everybody; there are some haves and some have-nots. I think the people surviving are the very large secondary-only players and the rest are secondary businesses within larger platforms like funds-of-funds."

Scale is becoming important yet there is also evidence of divergent strategies emerging. The likes of Ardian are more readily associated with very large portfolio deals, while middle-market players leverage their multi-strategy platforms to target particular funds. Segmentation does extend to smaller firms carving out particular niches, but only where the deal flow justifies it.

The secondary market may not yet offer something for everyone, but it is getting there. "Everyone has something for sale and the secondary market has become an accepted solution - one that allows institutions and investors alike to focus on trying to manage their portfolios more actively than ever before," says Hamilton Lane's Kerr.

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• Topics
• Secondaries
• Secondaries
• Fundraising
• Secondaries
• Fundraising
• HarbourVest Partners
• Coller Capital
• Hamilton Lane