This week my colleague Chris Witkowsky, editor of peHUB, wrote about the wide gap in estimates of the size of the “compulsively secretive” secondary market.
One shop puts global secondaries deal volume in 2013 at US$27.5 billion, while another source, Canadian advisory firm Setter Capital, reports activity as totaling US$36 billion.
The issue is more than just bean-counting.
The secondary market has seen unprecedented growth in recent years, especially since the 2007-2008 financial crisis, and has steadily diversified its coverage of alternative assets. It has also attracted countless buyers and sellers, particularly in the institutional community. Some of the market’s most active participants are Canadian LPs, such as CPPIB Private Investments.
What’s more, the market is a vital source of liquidity for private equity assets. Setter Capital estimates that more than three-quarters of last year’s transaction value was accounted for by PE fund stakes and direct investments.
Robert McGrath, managing director of Setter Capital, believes the secondaries universe is much broader than people realize.
“We began our survey last year with the sense that the market is much larger than previously thought,” said McGrath. “In my view, most volume estimates lack a stated methodology. Through our poll of 115 of the most active secondary buyers worldwide, we have tried to develop more granular data and get a better idea of the activity of small, mid-sized and large buyers.”
McGrath said a maturing secondary market has brought “more and more buyers out of the woodwork.” Many of these are known, but others, such as opportunistic and non-traditional players, are not. If you factor in the latter, McGrath argues that deal-making in 2013 might be closer to US$40 billion.
Setter Capital was co-founded by brothers Robert and Peter McGrath in 2006 to provide advice to institutional investors and fund managers about rebalancing portfolios, liquidating legacy assets and building exposure to alternative investments. At the time, the McGraths saw opportunity in the fast-growing space, and demand for an intermediary with a dedicated secondaries focus.
Setter Capital quickly emerged as a market force, completing a total of US$12 billion in client transactions in seven years. In 2013, the firm turned in its best performance to date, doing US$3.7 billion in deals, or a little over 10% of the global aggregate (using Setter Capital’s survey data).
McGrath thinks the firm’s track record is due in large part to an ability to demonstrate knowledge and value-adding capability.
“We believe it’s important to know your market,” he said. “Setter Capital from the beginning gave emphasis to great intelligence, which is what makes people want to take your call.”
Along with the survey, tools developed by the firm include the Setter Capital Liquidity Rating, an index of the relative liquidity of fund assets according to price-correlated buyer interest. McGrath said it has gained traction in the market, chiefly among sellers. The firm also created Secondary Link, a search engine and blog for sharing information.
McGrath believes that secondary deal-making will intensify in the months ahead. The firm’s survey results support this forecast, as almost all respondents expect that 2014 will ultimately reflect volume that is as large or larger than 2013. Much of the buy-side activity will continue to be led by LPs like CPPIB, “perhaps the biggest buyer in the world in terms of being able to write the biggest cheques.”
Setter Capital is based in Toronto. Along with the McGrath brothers, the firm employs 14 executives, analysts and other professionals.
Photo of money wave courtesy of Shutterstock
Photo of Robert McGrath courtesy of Setter Capital
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