PE Secondaries: New Strategies and Geographies Take Growing Market Share

According to market estimates, before the global financial crisis, 92 percent of private equity fund secondary sales by value involved buyout investment vehicles exclusively. Some 96 percent of funds changing hands focused on North America and Europe. However, since then – moving in lock-step with a private equity space that’s become more diverse by both strategy and geography – the market share of buyout vehicles and North American and European funds has declined. As annual secondary market volume soars to new heights, buyout funds are likely to continue accounting for the lion’s share of transactions, but the market share of more specialized strategies should grow further, as investors seek higher returns in less crowded areas. A record $70 billion to $80 billion worth of funds were sold on the secondary market last year, up nearly four-fold from the $18 billion sold in 2008 (then an all-time high) and market participants forecast a new record this year of $90 billion to $100 billion.

Non-Buyout Funds Account for More than a Quarter of Market Volume

Today, funds focused on debt, energy, infrastructure, real estate and venture capital account for 28 percent of secondary volume, according to Campbell Lutyens. The percentage is based on annual secondary volume in 2018 of $70 billion. The value of transactions involving emerging market funds has risen to 14 percent of market volume, a similar three-and-a-half-fold increase, from the 4% seen in 2008.

Venture Capital Secondary Volume More than Doubles in a Year

While overall volume in the secondary market grew by 46 percent last year, the value of transactions for venture capital fund secondaries rose 105 percent to some $5.7 billion, according to Campbell Lutyens. That represents the largest percentage gain for any sector in the private equity secondary market. Bolstering secondary sales of VC funds is a significant increase in the last three years in the value of venture capital funds that are five-to-ten years old (the sweet spot for secondary sales, regardless of type). This increase in value is largely mechanical, resulting from an unprecedented run of stellar fundraising years for venture capital that began in 2011. Meanwhile, buyers have been increasingly drawn to the sector, given the prospect of outsized returns from startups. Despite the record fundraisings and the possibility of stellar returns coming from investment in unicorns in the making, the extensive speculation of a VC bubble about to pop has given some investors pause, leading them to prepare for VC fund sales in the event the bubble does burst.

Asia Dominates the Growing Market Share of Emerging Market Funds

While the annual secondary volume of emerging market funds rose to an impressive $9.8 billion last year from some $600 million pre-GFC, approximately 80 percent of the annual volume is currently accounted for by Asia (led by China). While the dominance of Asia is likely to continue for some time, Africa and Latin America, with less developed private equity infrastructures, should see their relative market share rise, as private equity primary fundraisings, that feed secondary market volume, grow in these regions.

Evolving liquidity needs shown by the growth of secondary market

The Appeal of Regular Yields

One of the principal attractions of secondaries has always been the prospect of accelerated liquidity, with investors typically getting all their cash back from secondary funds in three-to-six years versus 10 years or more when investing through primary fundraisings. The ability to generate liquidity through the secondary market is significantly magnified via fund strategies that provide regular yields. Such strategies include infrastructure, real estate, and private debt. Real estate, infrastructure, and private debt accounted for respectively $7.7 billion, $7 billion and $2.8 billion of total secondary market volume in 2018. With defined distribution pension plans – perennially the biggest buyers of private equity funds – obliged to meet growing annual liabilities as a rising portion of the baby boom generation retire, the demand for secondaries in general, and more specifically those providing regular yields, should only grow. Private debt is likely to get the biggest boost as the sector matures. The assets of private equity debt funds grew three-fold in the decade through 2017 to $666 billion and are set to rise to $1.1 trillion by the end of 2020, according to the Alternative Credit Council.

Continuing Energy Funds Growth in Secondaries is Harder to Predict

Energy funds have been the slowest growing area of secondaries in recent years. Energy fund volume on the private equity secondary market rose a modest $200 million in two years to $2.2 billion in 2018, according to Campbell Lutyens. Seesawing market prices for petroleum products are making it challenging for buyers and sellers to find mutually satisfactory pricing.

Palico’s Marketplace is Ideal for a Diverse Secondary Market

As the secondary market becomes more diverse by both strategy and geography, Palico’s digital marketplace is an increasingly attractive venue for the buying and selling of secondaries. It allows sellers to reach a varied range of secondary buyers – from pension funds to family offices to some of the most active secondary funds – across the globe. With funds on the platform typically seeing 5-15 data requests within 24 hours of listing, investors enjoy the speed and engagement that comes from a platform that connects sellers directly to buyers.

Palico’s digital marketplace streamlines secondary and fundraising trading, in an ever-expanding range of PE strategies.

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