Overallocation-driven secondary sales more talk than action – Coller

“People are talking about it, but they are impacted in different ways. For example, if you are mainly investing in US dollar-denominated funds and your local currency has depreciated in US dollar terms, then you’ve got the denominator effect from the public-private split and on a foreign exchange level,” said Will Yea, a principal at the secondary investment firm.

“We aren’t seeing significant deal flow right now, but it’s on people’s minds as they think about 2023.”

Two-fifths of LPs participating in the latest edition of Coller’s private equity barometer survey said the denominator effect would likely cause a reduction in the pace of their private equity fund commitments over the next one to two years. This rose to two-thirds when the sample size was narrowed to LPs with over USD 20bn in assets under management and public pension funds.

Moreover, more than one-quarter of respondents said that liquidity shortfalls would lead to a reduction in commitment pace.

Half of LPs plan to utilise the secondary market in the next two years: 20% to sell assets only, 17% to buy assets only, and 14% to buy and sell assets. When the same question was asked two years ago, 13% of respondents only wanted to sell, 19% only wanted to buy and 20% wanted to do both.

There have also been changes in target allocations to alternatives over the next 12 months. Over the summer, half of LPs were planning to increase their exposure; now only 29% plan this course of action. For private equity specifically, the proportion of respondents looking to increase allocations has fallen from 42% to 27%. LP appetite for private debt is largely unchanged.

Yea expects more GP-led secondaries next year as well as LP portfolio trades, driven by the denominator effect, reduced liquidity, and valuations reflecting the new reality. He noted that GPs are usually “the first ones out the gate when there is a dislocation in the market or economic uncertainty,” because they know what’s in their portfolios and can more easily assess the exit prospects.

Coller has seen a widening spread or a widening discount to net asset value in transactions that have closed this year, but the speed at which valuations adjust will vary.

“Some managers will hold at 2021 valuations until companies need to raise more capital, but on the growth and buyout side, where there are more mark-to-market comps, the adjustments are coming through. Liquidity is one of the most pressing concerns in the overall market,” said Yea.

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• Topics
• Secondaries
• LPs
• GPs
• Portfolio management
• Coller Capital
• Secondaries