A majority of private equity secondaries managers will deploy more capital this year than in 2014, when both fundraising and transaction volume set records, according to a new study from alternatives data provider Preqin.
Preqin reported that 27 vehicles in 2014 raised $29 billion to buy investor commitments in other private equity funds, up from $22 billion the year before.
Secondaries transaction volume will likely reach an all-time high this year, following last year’s estimated $42 billion of purchases, Preqin said.
The study of more than 50 managers dedicated to secondaries assets showed that 67% planned to deploy more capital in 2015 that they did last year, and 27% said they would invest a similar amount.
Preqin noted that the secondary market is awash in capital, and this is influencing prices. Survey respondents said the average price paid for buyout funds on the secondary market was 90% of net asset value.
This year, 45% of secondaries managers expected to pay more for buyout funds, while 48% expected to pay the same.
Despite the strong pricing, Preqin said, buyers appeared to be both willing and able to pay more, as the strong environment for exits and distributions makes buyout funds in particular attractive.
The report said higher prices raised a concern about lower returns, and anecdotal evidence suggested secondaries buyers were increasingly turning to leverage to improve returns.
Last year, research showed, only 5% of respondents used debt to fund an acquisition. This year is different.
Thirty-four percent of respondents said they expected debt use to increase in 2015, and 66% predicted it would remain the same.
Last year, single fund purchases were the most common transaction type, completed by 77% of study respondents.
Sixty percent completed a purchase of a portfolio of funds, and 33% bought tail-end funds — funds with significant unrealized value; 25% of respondents expected to increase their activity relating to these in 2015.
Who the Sellers Are
Forty-two percent of secondaries fund managers said pension funds would sell funds in 2015. According to Preqin, pensions have become more comfortable using the secondary market to achieve their desired portfolios.
In addition, 36% of respondents predicted banks would be prominent sellers this year, and 29% cited insurance companies — both for regulatory reasons, Preqin said.
Preqin researchers classified private equity sellers on the secondary market into two groups. Possible sellers are those that may be over-allocated to a particular asset class or have put new investments on hold and possibly reviewing one or more manager relationships.
Opportunistic sellers are either proactively selling funds or are open to approaches from buyers.
Forty-one percent of opportunistic sellers hold funds of vintage years 2005 to 2008, which Preqin said was the “sweet spot” for most secondary buyers, as funds in that range of were typically returning capital to investors.
“The [secondary] market is no longer a last resort for distressed investors seeking liquidity, and now serves as a viable tool for the active management of alternative asset portfolios,” Patrick Adefuye, Preqin’s manager of funds of funds and secondaries, said in a statement.
“The nature of transactions being completed is becoming more sophisticated and innovative to fit the needs of the sellers. We believe that with expanding transaction types and a wealth of capital available, growth in secondary market transactions can only be expected.”
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