Setter Capital estimates $22 bln total secondaries volume in first half

Here it comes again … the second shot across the industry at estimating half-year volume on the hyperactive secondaries market.

Toronto-based secondaries intermediary Setter Capital has estimated total market volume in the first half at about US$22 billion. This is a big jump from the US$16 billion reported by rival firm Cogent Partners for first half activity.

Setter is estimating a 47 percent increase over the first half of 2013, which came in around US$15 billion, according to its estimates. Cogent’s volume estimate for the first half last year was around US$7 billion.

Setter gets to its higher number by taking the amount of US$14.3 billion reported by 81 survey respondents and grossing it up in proportion to the number of small, medium and large active buyers that did and did not participate.

“We believe this estimate is conservative, as it does not include the activity of over 1,000 opportunistic and non-traditional buyers, whose combined activity may be significant,” Setter said in the report, available here at SecondaryLink.com. “For instance, the activities of all sovereign funds…were excluded entirely, even though some have recently built teams dedicated to secondary purchases.”

Setter’s total number breaks down like this: US$16 billion in private equity directs and fund investments; US$3 billion in real estate; US$2.2 billion in hedge funds and US$0.5 billion in infrastructure funds. In the first half, US$17 billion of that total was in fund investments, while US$4.6 billion was in direct investments, including GP restructurings and acquisitions of co-investments and minority stakes, Setter said.

The biggest sellers in the first half were banks and pensions, according to Setter. However, GPs, funds of funds and hedge funds accounted for 28 percent of total volume, which ties into the increasing volume of direct sales as GPs use the secondaries market for liquidity and restructuring.

Through its methodology, Setter is attempting to capture what I’ve dubbed the “shadow market,” made up of the many private transactions that take place between individual sellers that never get recorded. This type of activity has become more prevalent on the secondary market as more unconventional buyers have added secondary strategies to their toolkit as ways to invest in GPs they like, and more sellers have gotten comfortable using the secondary market to manage their portfolios.

This is reflected in Setter’s estimate that 87 small buyers acquired US$3.8 billion, representing about 18 percent of total volume across 356 deals with an average size of US$10.7 million.

That compared to 30 medium buyers (defined as those that have deployed US$100 million to US$600 million in the first half), which spent US$8.4 billion across 348 deals, with average size of US$24 million, while nine large buyers (those deploying more than US$600 million) acquired US$9.6 billion across 213 deals with an average size of US$44.9 million.

Industry sources seem split on the legitimacy of the methodology. Some have told me Setter is capturing a big chunk of the market that doesn’t get talked about but absolutely exists, is active and is getting more active. Others, however, have criticized the idea of taking a base number and extrapolating out to arrive at a much higher total.

One issue on which both Setter and Cogent agree is the first half this year was much busier than last year, when the market was in something of a slump, out of which it emerged in the second half.

Cogent’s and Setter’s numbers both show a marked increase in activity in the first half compared to 2013. Both reported if activity remains at this level, the full-year total will break prior year records. Setter is predicting full-year volume across all assets classes of US$45 billion, which would be a 25 percent increase over the total US$36 billion volume that it estimated last year. Cogent believes at current levels volume would eclipse US$30 billion for the first time ever.

Setter Capital was profiled by peHUB Canada in February 2014.

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