PE Panorama: Surge in secondaries interest

23 June 2014   Category: News, Asia, Australia, USA   By Paul Mackintosh

Preqin has picked up on a striking rise in fundraising for secondaries in its latest published research. According to the firm, “eight private equity secondaries funds have closed in 2014 so far, raising an aggregate US$13 billion in investor commitments. This is more than triple the $4.2 billion raised by six secondaries funds closed in the same time period in 2013”. On top of this, Preqin notes that “there are currently 27 private equity secondaries vehicles in market seeking to raise an aggregate $24 billion”, citing the single largest secondaries fund still in the market, Lexington Capital Partners VIII, targeting $8 billion, which held a first close of $5.5 billion in February 2014.

What’s driving this surge in interest in secondary opportunities in funds? According to Preqin’s analysis, based on a survey of some 60 institutional investors in private equity, it’s less about seeking bargain positions in funds, and far more about portfolio optimisation, including liquidity. States Preqin: “48% of investors view the secondary market as of core or growing importance to their private equity portfolios”. Some 36% cited mitigation of the J-curve effect as a key driver in their secondaries moves, more than double the number who did so one year ago. Similarly, “39% named liquidity requirements as their reason” for selling private equity positions on the secondary market, slightly under double those who did this in 2013. Finally, all the limited partners (LPs) surveyed “expect the current high level of secondary market activity to either be maintained (78%) or increase (22%)”.

This could be interesting for Asia in the light of other recent news, this time from Reuters, which quotes Bain & Co. research that as at mid-year 2014, Asian private equity has a record $138 billion in unspent capital on its books, waiting to be invested. Adding this to last week’s PE Panorama, which showed banks struggling to get around US regulations and lend more for private equity deals, and the Asian industry could be getting very peaky, recalling the heady days just before the Lehman Brothers collapse in 2008. The same article quotes the example of CVC and Australia’s Nine Entertainment, which produced Asia Pacific private equity’s worst ever loss when CVC disposed of it to other funds in 2012. Barely two years later, the general partners (GPs) show signs of ramping up for similarly top-end highly levered deals. And the secondary market is the classic adjustment mechanism when a frothy market comes off the boil. All that secondary capital could have a big shopping opportunity in Asia if some of those high-rolling Asia Pacific GPs turned out to have made the same less-than-optimal calls as last time round.