Secondary Pricing report H1 2019

It’s time to adopt the brace position. Tough times are on the way. There are few who doubt we are now teetering on the brink of an economic downturn after one of the longest bull-runs in history. 

Just under two-thirds of LPs in Preqin’s H1 2019 Alternative Asset Investor Outlook think we have reached the peak of the market.

Family offices continue to be a hot topic these days. According to FINTRX, a Boston-based family office data and research platform, there are now 2,350 family offices globally, with over $50 million in AUM. That is an increase of 23% over the previous year when the same report showed 1,910 family offices with over $50 million in AUM.

As family offices continue to grow in size and volume, so have their commitments to private equity, and no exception has been their evolving and growing appetite for secondaries - a trend which has grown much faster than most might realize.

Secondary portfolios are trending towards majority or single buyer sales, but sellers may be missing out on optimizing pricing

Billion dollar transactions are becoming more commonplace in the secondary market, with sellers shopping around record-breaking portfolios as of late. Secondary funds are raising record amounts of capital, just note the surge of mega-funds in the sector, that will need to be deployed in the years to come. With the secondary market continuing to grow, there will surely be increased appetite to pick-up large portfolios being shopped around by mainstays in the advising industry such as Greenhill, or Campbell Lutyens. In cases where the sale is prompted by distress or regulation, selling lines in bulk can be a necessary outcome. However, when these pressures aren’t present are sellers maximizing value via large portfolio sales? Is the whole always greater than the sum of the parts?

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.

Speculation continues to mount as to whether we are amidst a VC bubble. Certainly, we are not the first to say this and, in some ways, we might stop asking if we are witnessing a VC bubble but rather when this bubble will pop and to what end this may lead to a jump in VC secondary transactions.

Secondary Market Grows Four-Fold in a Decade

The secondary market for closed private equity funds looks set for its best year ever. Following last year’s $70 billion to $80 billion all-time volume high (surpassing 2017’s record year by as much as 47 percent), press reports note that at the current pace, transactions in the first three months of 2019 will amount to $18 billion, well ahead of last year’s first quarter record of $13 billion. The secondary market has certainly come a long way. A decade ago annual market volume amounted to some $16 billion, less than a fourth of current levels. The largest fund ten years ago, Coller International Capital Partners V (raised in 2007) collected some $4.8 billion - twice the amount of its previous fund, but just about a fourth of Ardian’s most recent fund.

We’ve said it before and so have countless other reports in the industry, emerging managers, officially classified as first and second-time funds, outperform time and time again. However, the negative perception of these managers still weighs heavily on their backs, impeding their access to capital distributions from large investors, namely institutional investors. The idea behind the reluctance is the perceived high-risk nature of allocating funds with an emerging manager who has little to no independent track record. In the case of first-time funds, this has stopped roughly half of all private equity investors and, according to Preqin, 60 percent of all institutional investors from investing due to in-house policies barring the action.

Christian Czernich ist CEO, Founder und Managing Partner bei Round2 Capital Partners. Im Gespräch mit Palico haben wir uns über das Revenue-based Financing ausgetauscht und diskutiert inwieweit dieses eine Antwort auf die gegenwärtigen Herausforderungen für junge Tech-Unternehmen bieten kann.