Secondaries Are Hot

Secondary markets were on a tear in 2010, with transactions volumes up 79% year-over-year to total $22.1 billion. Factors fueling the upturn include an increase in secondary buyers, higher asset prices, greater activity among sellers in restructuring their portfolios, and an uptick in capital calls that added pressure for liquidity.

The year-in-review and forecast report published this week by NYPPEX, a secondary market maker, is predicting this year will be even bigger.

Given the assets already in the pipeline, the whopping sums raised by secondary funds last year and new capital calls, NYPPEX predicts this year could make last year look like a walk in the park.

The report said secondary private transaction volume for 2011 will increase 45% year-over-year to total just over $32 billion. The firm sees the volume of uncalled commitments – estimated to total $825 billion – boosting secondary activity, with up to 20% of the total outstanding expected to be called down in the next few years.

Rising asset prices are also contributing to higher transaction volumes. NYPPEX estimates that median secondary bid prices for interests in private equity-related and hedge funds increased approximately 22% to 68.98% of net asset value over the course of 2010. Of that, buyout funds comprised the biggest chunk (47%), followed by real estate funds (18%), hedge funds (12%), venture funds (12%) and distressed debt funds (11%).

The popularity of social media like Facebook, Twitter and LinkedIn contributed greatly to the venture volumes. Both institutions and private clients increasingly purchased secondary shares in leading pre-IPO private companies, and motivated sellers lined up. For example, employee sellers increasingly sought cash to pay expected tax liabilities caused by newly-vested restricted share units. In addition, an increasing number of venture funds needed working capital, or sought realizations, to make distributions to investors.

For the largest private social media companies (e.g. Facebook, Twitter, Groupon, Linkedin, Zynga), NYPPEX estimates that valuations increased approximately 54% on average, over the 5 month period from June 30, 2010 to December 1, 2010.