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.
Volume in the secondary market for closed private equity funds soared last year as much as 47 percent with record annual aggregate value estimates in this opaque market ranging from $70 to $80 billion according to various sources. Given historically attractive pricing for sellers and the unprecedented sums earmarked for secondary purchases, record volume makes sense. The average transaction on the private equity secondary market stands at 102.5 percent of fund net asset value, according to a recent Palico marketplace survey (sent to members last month) – the highest level we’ve ever recorded. Meanwhile, estimates from industry intermediaries for committed but unspent capital in the secondaries market are at all-time highs of between $180 and $200 billion.
The typical transaction on the private equity secondary market is valued at 102.5 percent of net asset value in terms of mean, with the median at 101 percent, according to a Palico survey of limited partners who’ve successfully purchased stakes in closed funds over the last six months. This is the highest pricing Palico has recorded since we began tracking secondary transactions in March 2017. This latest survey covers 30 funds of all types from real assets to private debt, buyout and venture.
Liquidity may have been hard to come by for PE investors in the 90s, but almost thirty years down the road it has become a demand. Regardless of the numerous reasons LPs have cited for selling their stakes, one thing is clear, they are less eager to wait for returns. So one can ask: are LPs going schizo? They’ve been investing in the PE market for years knowing of its illiquid state and 10-year plus lifecycles, so is waiting a lost art? And especially, what is fueling their growing desire to cash out?
Shahram Seyedin-Noor is the Founder and General Partner of Civilization Ventures, a San Francisco-based venture capital fund investing at the intersection of health tech and synthetic biology. We recently caught up with Shahram to discuss his fund’s unique value proposition and his experience successfully leveraging the Palico marketplace.
Daniel Ibri is the managing partner and founder of Mindset Ventures Sao Paolo. We sat down with Daniel and discussed some of the pains of fundraising for emerging market funds looking to expand outside of the constraints of their own borders. In this Q&A he explains why Palico is an essential tool for small funds and how it helped attract new investors beyond Brazil.
|Palico’s Digital Marketplace Offers a Wealth of Emerging Markets Funds|
Yet Palico offers a large variety of emerging market opportunities that can streamline the private equity investment process. Some two out of five primary and secondary investment opportunities among Palico’s listings are focused on the emerging markets of Asia, Africa, the Middle East and Latin America. Moreover, more than four out of five of those offerings are for funds of $250 million or less. They’re not only focused on dynamic family-run companies, but overwhelmingly on the more inefficiently priced small cap sectors of emerging markets. Primary and secondary emerging market opportunities also cover over 30 specialties, ranging from mezzanine finance in Mexico to impact investing in fast-growing Southeast Asian countries.
|Emerging Market Listings Targeting Nearly $10 billion|
Altogether, the aggregate capital targeted or raised by primary and secondary opportunities listed on Palico’s digital marketplace amounts to $9.8 billion. Among the fundraisings, the majority have already held at least a first close on capital commitments - demonstrating traction among investors. Some two out of five emerging market fundraisings on Palico represent first-time vehicles, the vast majority run by veteran, but hungry managers, eager to prove themselves as independent operators. This is in the context of recent evidence that the average first-time fund outperforms the average later-generation vehicle.
|Helping LPs Find Investments, Palico’s Digital Marketplace Can Improve Returns|
By bringing fundraisings and secondaries to desktops and smart devices, along with a wealth of information on those opportunities, Palico gives limited partners and their advisors more time to discover, analyze and invest in highly promising, frequently hard-to-find funds. Palico fits seamlessly with all channels of capital commitment, yet its digital marketplace makes fundraisings and secondaries - covering all strategies and regions - more accessible and affordable.