The crash of cash into the PE secondaries market will lead to another strong year in 2012 after two years of record setting transaction volumes, Partners Group experts say.
At the close of 2011, bid-ask spreads for secondaries widened on public market volatility. Trading in 2012 looks like it will bring more of the same, said Scott Higbee, head investment solutions Americas at Partners Group, an international investment management firm.
Meanwhile, deal flow in secondaries is expected to be bolstered by pensions and financial institutions that have flooded the marketplace with cash. Partners, for instance, acknowledged in a published report that it did $1.7 billion in secondary deals last year.
Sources that spoke separately with peHUB acknowledged that pricing of secondary assets have been approaching peak rates in recent deals on the strength of the sheer buying power and appetite. However, Partners wasn’t as bullish on the next batch of funds, if they even come at all, despite the money in the market.
“Low fundraising numbers reflect ongoing challenges in exit markets,” the firm’s report stated. “Until investors begin to see a sustainable flow of quality IPOs leading to significant distributions,” VCs shouldn’t expect any new big commitment checks.
Private equity could feel the burn, too. The Partners Group report predicted—but for different reasons – that the asset class will suffer from more expensive and increasingly scarce debt, especially for large deals, as European banks and others try to shrink balance sheets to meet new requirements.
“In the large cap segment of the market, it’s tough right now,” Higbee said.
Not that mid- and small-cap managers will have it much better when they try to raise new funds, he acknowledged.
Still, not all PE managers should despair, Higbee said. While debt will be more difficult to amass and rising wages and competitive investors hamper the quality of opportunities in places such as China, both he and his firm are bullish on corporate governance progress made in Latin America, particularly Chile and Brazil.