Direct secondaries slow as market stays busy

  • Overall secondary volume hit a plateau last year
  • Direct secondaries activity dropped
  • Directs will continue to drive market

The secondary market is as active as ever, but the amount of direct secondaries, like restructurings, slowed last year, according to intermediary Setter Capital.

Overall secondary volume came in around $49.6 billion, Setter said in its newly released year-end volume report. This compares to the $42 billion volume total reported by Evercore in January and $40 billion estimated for 2015 by Greenhill Cogent.

Overall volume, according to Setter, hit a plateau last year, only increasing slightly from the $49.3 billion in 2014.

Direct secondaries, tender offers and acquisitions of portfolio companies, decreased from $11 billion in 2014 to $10.2 billion last year, a 7.3 percent decline, Setter said. The decrease came despite overall supply increasing, Setter said.

“Respondents felt that more managers attempted to liquidate or restructure older funds in 2015 as compared to 2014,” Setter said.

Secondaries hinge on buy-in from LPs, who have to decide whether to sell out of their stakes in funds. For this to happen, the price must be robust. The other question for LPs, when they do sell, is: What should they do with the proceeds? Last year, because of the strong markets, many LPs may have decided it made more economic sense not to sell.

One example was Kelso & Co, which ran a tender offer to buy up to $1 billion worth of LP stakes in the firm’s eighth fund. The deal ended up generating between $150 million and $500 million of LP sales, sources said. Ardian, the buyer in the transaction, said the sale was “significantly” higher than $300 million.

LPs also are getting more vocal on GP-led direct secondary deals, which can delay processes in the market as LPs and GPs spend time negotiating.

However, the feeling is direct secondaries will continue to increase in importance and become a bigger chunk of secondary market activity, sources have said in past interviews.

“GP-led situations will grow, and it won’t necessarily just be GPs trying to have another lease on life, it will also be high-quality GPs looking to provide liquidity to older funds,” said a buyer on the secondary market. “We’ll see that market continue to grow and mature.”

Setter found that private equity secondaries, both directs and fund stakes, hit $37.7 billion last year, a slight decrease from 2014. Real estate secondaries reached $9.2 billion, a 34.7 percent increase from the prior year. Hedge fund secondaries declined 66.7 percent to $835 million in 2015, while infrastructure fund secondaries hit $1.6 billion, a 15.6 percent increase from 2014.

Action Item: Check out Setter’s report here:

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