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Editor’s Letter: Secondaries is major recipient of rise of private capital

The massive flow of capital into private markets is having an interesting effect, according to Hugh MacArthur of Bain & Co. It’s boosting the average multiple of Ebitda of private assets above that of public assets for the first time since the era just before the global financial crisis.

Generally, investors are willing to pay more for public assets for increased transparency and liquidity. As well, the universe of public investors is broader, attracting massive capital flows, MacArthur wrote in a recent PE HUB column.

However, companies these days can tap private equity or institutional capital with relative ease and borrow at low rates and don’t need the hassle of going public. Because of this, IPO activity has plummeted, while the pool of companies ripe for take-privates has doubled since 2013, MacArthur wrote.

Private equity firms are sitting on around $2 trillion of unspent capital ($695 billion in buyouts), and fundraising is showing no signs of slowing.

With these dynamics in place, Bain & Co sees several implications, which include a continual decrease in initial public offerings as an exit path for private equity; more public-to-private transactions; larger megafunds; and more access to PE funds for retail investors as firms look for new capital streams.

I would add another change: increasing private equity secondary activity in the venture markets as firms choose to keep their investments private longer. Venture deals represented only 8 percent of overall deal volume in 2018, according to estimates from UBS.

Secondary processes like the one completed by New Enterprise Associates last year are one way to give a manager more time to manage assets, while paying back LPs in older funds, and overall avoid going public.

NEA moved out 31 private investments from four older funds with vintages from 2006 to 2015 into a new pool managed by ex-NEA executive Ravi Viswanathan. The total value of the deal was $1.35 billion. Goldman Sachs was lead buyer on the deal, which also included Hamilton Lane and 18 other investors.

Secondaries have already been on the upswing for the past several years and there doesn’t seem to be any slowdown in this side of the market. Add in a host of venture firms using secondaries to extend out fund lives and avoid the public markets, and this trend will grow.

Estimations of secondary activity in 2018 are at $70 billion or more, and I’m betting that volume total goes higher this year. All aspects of the private markets are running at full steam; it’s a good time to be private.