A Palico survey of limited partners who’ve successfully purchased stakes in private equity funds on the secondary market over the last six months shows exceptionally strong pricing, with the average sale happening at 99.8 percent of a fund’s most recently reported net asset value. Moreover, 12 out of the 25 funds for which Palico has winning bid data were sold at par or better. These funds generated an average premium of 6.8 percent above NAV. Funds sold at less than par went for an average discount to NAV of 6.5 percent.
A Palico survey of limited partners who’ve successfully purchased stakes in private equity funds on the secondary market over the last six months indicates the current sweet spot for premium pricing (in relation to net asset value) is for vehicles that began investing in 2011. That vintage accounts for five of 13 funds priced at par or better.
A Palico survey of limited partners who’ve successfully purchased stakes in private equity funds on the secondary market over the last six months shows particularly strong pricing. The typical transaction is valued at 99.7 percent of the most recently reported net asset value. Moreover, 12 of the 25 funds for which Palico has winning bid data are valued at premiums, with the average sale price 6.8 percent above NAV. For funds sold at par or less, the average transaction is valued at 93 percent of NAV.
Over the past five years the secondary market for stakes in closed private equity funds has gone from strength to strength. Pricing over the last half-decade has been remarkably attractive for sellers, with the average price - expressed as a percentage of net asset value - never dipping below 91 percent. This illustrates strong long-term secular demand.
Pension fund market share of global annual private equity commitments has dropped by a fifth since 2011, when the first American baby boomers began retiring. Standing at 31 percent, that market share will drop further as pension funds seek to maximize cash flow to meet mounting liabilities owed to baby boomers. The baby boom generation should finish retiring by 2030 in the U.S., when the population of those 65 and older will amount to some 21 percent of the total population, though in many European countries boomer retirement won’t peter out for another decade beyond that.
According to Palico data, 2,914 private equity funds are currently seeking $980 billion. Fund numbers are up 7 percent from the previous record of 2,720 funds seeking capital in February, the last time Palico visited this topic. While that’s a significant increase in just ten months, the aggregate sum targeted has risen a modest 1.6 percent from February’s $965 billion.
|In Nearly Two Years, the Number of Fundraisings is up More than 13 Percent|
The total sum targeted today by fundraisings is up less than a percentage point from the $972 billion sought in February 2015, when Palico first started following this market, but fund ranks have swelled 13.4 percent in the same period from 2,570 vehicles. With investors seeking to commit more to fewer managers, competition in the fundraising market continues to increase.
|The Market Moves Further Away from Buyout Funds|
Buyout funds, the largest vehicles in the private equity space, have lost almost a fifth of the 22 percent fundraising market share they accounted for in February, 2015 (see tables). That and the rise of smaller, niche funds focusing on less crowded spaces where assets can be had more cheaply - at a time of record high prices for buyout transactions - does much to explain why the number of fundraisings is increasing while the total sum targeted is largely static.
|Funds-of-Funds and Secondary Funds Account for Greater Market Share|
Since February, 2015, the number of funds-of-funds and secondary funds raising money from investors has steadily increased, evidence of a renaissance of sorts for the former and new-found popularity for the latter. In tandem with the growing preference for specialization, funds-of-funds - seen as little more than an extra layer of fees in the first few years following the global financial crisis - have reconnected with investors as niche specialists in everything from infrastructure funds to first-time managers. Meanwhile, secondary funds can offer investors a way to get capital gains faster and with less risk than primary investing (though the tradeoff for safety maybe lower returns). They invest in mature, closed funds holding assets that can be analyzed and which are likely to be teed up for sale in short order.
|More European Funds|
Geographically, offerings continue to fan out from the U.S., where the long-term, activist investment style that defines private equity was first developed. Europe, in particular, is well represented in the current crop of fundraisings, accounting for 30.6 percent of the market by number of vehicles. That’s a fifth more than the share of European offerings in February. The sharp jump is in part explained by many European managers seizing on the appeal of euro-denominated funds at a period of dollar strength. The U.S. continues to lead the fundraising market, accounting for 35.6 percent of offerings, down from 36.3 percent this past February.
|Palico Helps Investors Find Investments and Managers Find Investors|
The growing diversity of private equity across strategies and regions, and the ever rising number of investors interested in committing to the asset category can stretch the resources of limited partners and general partners alike. By bringing primary fundraising and secondary investment opportunities to desktops and smart devices, Palico makes the process of discovery and transacting easier for everyone.
Whether it’s Hillary Clinton or Donald Trump who emerges as the winner of the United States presidential election, one thing looks clear to us: Public stock markets, fixed income instruments, currencies, and the general macroeconomic outlook for the world will remain subject to extreme uncertainty, and prey to considerable volatility, especially given the ramifications of an America that will remain exceptionally polarized. The potential of destabilizing political gridlock in the U.S., combined with slow global economic growth, also makes it highly probable that today’s near-record low interest rates will persist well into the future.
|Private Equity is an Investment Style That Stands up Well to Shocks|
We would posit that by reinforcing global economic uncertainty, this year’s polarizing U.S. presidential election process favors only one investment category: private equity. The activist, long-term investment approach that defines private equity - it’s an investment style rather than a particular type of asset - insulates it from shocks and gives it a micro focus that’s largely uncorrelated with overall economic slowdown and volatility. Indeed, current private equity investors are so enamoured with PE that 70 percent intend to increase their 2016 allocation relative to other investments, according to a recent Palico survey of 106 limited partners.
|Remarkable Growth Likely to Accelerate|
Private equity has grown from a small blip on the financial landscape to an investment style embracing all asset categories, from credit to real assets. The young investment class’ assets under management have increased to $4.3 trillion from a mere $30 billion a quarter century ago. Private equity assets under management could grow nearly three-and-a-half fold over the next 10 years, to $15 trillion, or to an estimated 3 percent of global financial assets from today’s 1.5 percent, if historic growth rates continue. That’s a base case scenario. Private equity will grow even more strongly in the face of increased economic uncertainty and public market volatility.
|A Marketplace that can Handle PE Growth and Diversity|
With private equity’s activist, long-term investment approach now encompassing all asset classes and regions, it’s hard to navigate PE just with traditional means. From their desktop or smart devices, investors can now explore $53.4 billion of primary, secondary and co-investment opportunities on Palico’s online marketplace. Palico’s mission is to meet the challenges of a much larger and more diverse private equity universe.
|Secondaries Investors Focus on Mainstream Strategies|
Using Palico’s wish lists, since the end of March last year investors have selected 1,136 different funds that they would like to purchase through the secondary market. In total, over 18 months Palico members have registered 2,234 wishes. Arguably, the biggest change between this period and the previous year-and a-half, is the kind of fund investors typically want to buy. When we did this exercise in the spring of 2015, the top-10 list was peppered with specialists, including two fairly targeted emerging markets vehicles (one focusing on Latin America and one on China), a U.S. distressed fund, an oil & gas fund and a small cap fund. The current list is mostly made up of mainstream generalist funds - either large buyout or midmarket vehicles.
|Older Vintages Seen Offering Better Value|
Through primary market fundraisings, investors are increasingly committing to niche strategies - almost by definition uncrowded areas where pricing looks attractive. But they are increasingly seeking exposure to private equity’s mainstream through older fund vintages that are characterized by lower acquisition multiples than the record highs holding sway today. More often than not, the stakes of older PE vehicles tend to be valued conservatively, plus the funds are often available at discounts to net asset value.
|For LPs Focused on North America, Large Buyout Funds are Particularly Popular|
‘Play-it-safe’ mega vehicles that hold stakes in large companies, mostly in the U.S., rank as the three most popular funds on secondary wish lists - the top-ranked vehicle is run by Blackstone with both the second and third ranked managed by Carlyle. Given public markets are considered fully valued by many, and U.S. interest rates look on course for a series of hikes, investors in U.S. private equity - despite their long-term focus - are relatively risk averse today.
|Europe is Seen as a Place of Bargains in the Secondary Market|
With interest rates likely to stay low in Europe for the foreseeable future, many view the region, characterized by slow growth and a historically cheap currency, as a bargain compared with the U.S. This may explain why a plurality of the 10 most wished for funds on Palico - 50 percent - are Europe focused. All of them also concentrate their investment in midmarket companies, typically firms with revenues of less than $500 million. Generally, the midmarket is regarded as riskier than large buyouts, but with higher potential returns.
|Asia and Venture Round out the Top 10|
The only emerging market fund on the top-10 list is 9th placed Affinity Asia Pacific III. At $2.8 billion, it’s a large emerging market vehicle with a particularly broad geographic focus - all of the Asia Pacific region. Ranked in 10th and final place is the only really niche-focused fund on the list, Access Venture Partners II. The $30 million vehicle focuses on venture capital investments in Colorado, a particularly small but highly regarded center for tech startups. Given the large number of investors who would like exposure to VC in Colorado, and the relative dearth of venture capitalists in the state, the popularity of Access in the secondary market is less surprising than it might seem.
|Palico is Great for Secondaries and For Fundraising Connections|
A new fundraising or secondary is posted daily, and over 1,000 LPs and GPs initiate contact on Palico every month. Moreover, using Palico’s newly launched Secondaries Match platform, LPs can vet, buy and sell secondaries with or without the aid of intermediaries, and with sellers guaranteed full anonymity prior to transactions.
Given that the private equity fundraising market has never been more crowded or diverse than it is today, with a record 2,959 funds seeking capital, it’s hardly surprising that many investors feel hard pressed when it comes to sourcing, vetting and investing in the best private equity opportunities. Indeed, the conviction among LPs that cooperation with their peers will be an increasingly important tool for broadening their resources and improving returns emerges as a striking theme in Palico’s two most recent biannual surveys of limited partners and general partners.
Through the end of July, $309 billion has been committed to private equity funds this year, according to Palico estimates. At the current pace, $531 billion will be raised by PE funds in 2016, a post-financial crisis record, and a sum exceeded only by the $557 billion collected in 2008.