Pension funds are becoming more active in the private equity secondary market at a time when activity is hitting historic highs. Helen Fowler finds out why investors are drawn in despite narrow spreads
Secondary deals in the private equity industry are reaching record levels, at a time when pension funds are paying an ever-greater role in the market. The value of these transactions has more than tripled from just over $7bn eight years ago to an estimated $24bn by this year – potentially making 2011 the busiest year on record. In the first six months of this year alone, around $14bn in secondary deals have already taken place.
Yet, oddly enough, this record activity comes at a time when secondary buyers can expect only small discounts – often less than 5% – to the value of the assets they are purchasing. In contrast, discounts to net asset value rose as high as 35% in the months following the 2008 crisis, according to Triago, an intermediary that acts on behalf of sellers wishing to dispose of assets in the secondary market.
The discount has since returned to the same level as available pre-crisis – disappointing buyers who hoped to snap up some bargains by buying assets from a fund before it reached full maturity.
Private equity remains burdened by poorly performing investments made at the height of the credit bubble from 2005 to 2008
Some of the more attractive assets up for sale are even selling at their net value or for a slight premium, according to Jean-Marc Cuvilly, New York-based managing partner at Triago.
So why are buyers flocking to secondary private equity deals at a time when these transactions are no longer looking so cheap? The reasons are two-fold. Firstly, the secondary market tends to shadow what has been happening in the overall private equity industry, but with a time-lag of several years.
“An important reason for secondary market growth is to consider the growth of the wider private equity market in the record fundraising years prior to the financial crisis,” said Sanjay Mistry, UK-based director of private equity fund of funds at investment consultant Mercer.
Many of the investments made at the height of the credit bubble are only now ready to be sold into the secondary market. “Taking the view that the proportion of secondary to primary transactions remains stable, this will also result in monetary growth of the secondary market,” added Mistry. The secondary market has tended to account for a steady 2%-3% of the overall industry.
The other reason is a time lag in the data showing discounts in the secondary market. Although current discounts have narrowed, many of the deals happening at the moment will be based on the wider discounts available nine months ago.
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