Back to School: Secondaries fundraising helps drive record deal activity

Fueling record levels of deal activity on the private equity secondaries market is an ever-more robust fundraising channel filling the coffers of secondary buyers.

In turn, the strong fundraising environment for secondaries is being driven by growing limited partner appetite for exposure to the strategy because of its strong returns.

This is the way the cycle is supposed to work — strong returns prompt strong fundraising, which gives strong managers more capital to drive even stronger returns. That appears to be the cycle the private equity secondaries market is in right now, and GPs and LPs are eating it up, because cycles eventually turn.

With this in mind, secondary firms raised $2.6 billion in the first quarter, the largest first-quarter haul since 2012, according to alternative assets data provider Preqin.

The good start for secondaries fundraising could mean that 2016 will eclipse last year’s total, which represented a slowdown from past years. Limited partners committed $22 billion to secondaries in 2015, compared to $30 billion in 2014, Preqin said.

As of April, 36 secondaries funds were seeking $28 billion, up from 22 funds targeting $17 billion in January 2015, Preqin said.

Large secondary fund managers are helping boost the fundraising numbers. Ardian, for example, said April 19 it raised $14 billion for its seventh global fund, with $10.8 billion for secondaries, and the remainder for fund-of-funds commitments. That tally eclipsed Ardian’s prior global fund, which closed on $10 billion.

Other big players in the market include Partners Group, which held a final close on its Partners Group Secondary 2015 fund on $2.5 billion during the first quarter. Blackstone’s Strategic Partners group is targeting $5.5 billion for its seventh secondary fund, and Pantheon has a goal of $2.5 billion for its fifth secondary vehicle.

LPs are increasingly looking to the secondary market to make commitments because overall performance has been strong. Preqin reported secondaries funds delivered a higher median internal rate of return compared to other strategies for vintages 2008 to 2013.

Secondary managers shouldn’t have too much trouble spending capital as sellers like public pensions in the United States and sovereign wealth funds actively manage their portfolios. Deal activity totaled around $40 billion in 2015, according to intermediary Greenhill Cogent, down only slightly from the record-setting $42 billion total of 2014.

Anecdotally, several secondary market sources said 2016 has started out with robust deal activity in the market. Two sources said the early volatility in the public markets did cause a hiccup and seller uncertainty could persist through the year, keeping activity below year-ago levels.

As well, there was about $246.2 billion of unrealized capital in buyout and growth funds of vintage 2006 or older as of September 2015, Preqin said.

This represents an opportunity for secondary managers, Preqin said. “As fund managers face pressure to realize investments and return capital to their investors from aging funds, the secondary market represents a potential exit option for these assets,” Preqin said.

Action Item: See Preqin’s secondary report:

Photo of businessman drawing a growth graph courtesy of iStock/Andresr