Setter Capital: Secondary Market Activity Slips 5.1% in 1H/15

Aug 17 2015 | 12:17pm ET

Secondary deal volume slipped 5.1% in the first half of 2015 to $20.6 billion after two years of strong growth, according to new research from intermediary Setter Capital.

Setter’s 2H15 Capital Volume Report reveals strong differences between various segments of the secondaries market.

Highlights of the report include:

  • Private equity secondaries grew 1.9% year over year, reaching a total of $16.2 billion.
  • Real estate secondaries were down 1.8%. 
  • Hedge fund secondaries experienced the largest drop, down 78.6%, as side pocket supply continued to evaporate. 
  • Energy fund secondaries were also down 78.5% year over year, from $1.6 billion to $350 million, as falling energy prices caused the bid-ask spread to widen. 
  • The biggest volume improvement was seen in infrastructure secondaries, growing 28.5% to $614 million, as buyers continued to enter this new market.
  • Intermediation is increasing, with around 65.6% of total secondary volume involving an intermediary in the first half, compared to 59% in 1H/14. Setter expects intermediation to increase as new agents enter the market and sellers struggle to stay on top of the ever growing buyer universe.
  • There were 586 transactions in 1H/15, averaging approximately $35.1 million per deal. Although the number of transactions was lower than H1 2014, the average deal size increased 49.5% year over year, reflecting the fact that more multi-hundred million-dollar transactions were completed in this year’s first half.

Setter’s survey also polled industry participants as to the composition of the first half’s volume. The volume of so-called direct secondaries hit $5.5 billion, up 21% year over year, as more managers looked to liquidate or restructure older funds. This is not surprising given that 45% of respondents felt that more managers attempted to liquidate or restructure older funds in H1 2015 as compared to H1 2014.

Managers also increasingly turned to the secondary market to explore stapled transactions, as roughly 31% of respondents felt that a materially higher number had sought staples in H1 2015 as compared to H1 2014. 

Interestingly, Setter’s report supported industry indications that fund managers are increasingly used the secondary market to create liquidity, with roughly 34% of total sale volume coming from buyout, VC, hedge, fund of funds and secondary funds.

Setter pointed out that total deal volume, which is measured in U.S. dollar, may have been negatively impacted by the approximately 19% depreciation of the euro during the period, since roughly 25% of total volume comes from European fund/asset purchases. 

DEALS GRAVITATE TO LARGER PLAYERS

The survey also revealed that although the breadth and number of buyers continued to increase during the half, deal activity remains confined among the largest players. The eight largest buyers, defined as those that deployed more than $600 million during the period, accounted for 49% of the market’s total volume, up from 44% in the first half of last year. 

Deal share of small- and mid-sized buyers, meanwhile, slipped; 30 mid-sized participants accounted for roughly 35% of volume, down from 38%, and the share of 78 small buyers fell from 18% in 2014’s first half to 16% this year.  

Setter’s survey also found that buyers continue to diversify their secondary focus. 23% of participants bought other alternative investment types, such as infrastructure and real estate, for the first time. 

Competition for secondary deals remains fierce, according to the report. 97% of respondents felt it was either similar or higher than last year, while the use of debt to improve pricing and returns became more prevalent - 44% of respondents felt that buyers had used significantly more leverage as compared to the prior year. 

LOOKING AHEAD

Going forward, Setter’s research suggests most buyers expect pensions to be most active sellers in H2. Pricing, which is largely determined by buyers’ forecasts of NAV changes and distribution flows, is likely to remain flat in the second half as the pace of distributions is predicted to be only 0.4% higher and NAVs would only appreciate a modest 1.65%. 

All told, secondary buyers expect full year 2015 volume to be $45.7 billion, which would be a 7.4% decrease over the $49.3 billion transacted in 2014, according to the survey. This is in contrast to the $56.5 billion predicted by buyers just six months ago in the Setter Capital Volume Report FY 2014, signifying a more measured outlook.

Setter’s Capital Volume Report surveys major players in the secondary market with a series of questions ranging from volume transacted over the first half of the year to most active sellers and forward predictions. Participation in the survey was high, with responses received from 78 of the top 116 secondary buyers, eight of the ten largest buyers, and represented 78% of the transaction volume.

The full report is available here.

Toronto-based Setter Capital was founded in 2006 and provides intermediary services to endowments, foundations, pensions and institutional investment managers that invest across private equity, infrastructure, hedge fund, real estate and other alternative asset classes. 


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