2017 marks a new volume record for the secondary market. The amount of transactions carried out in 2017 ranged from $48 billion (according to Credit Suisse) to $58 billion (according to Greenhill), a level never reached before and rising sharply over the previous three years.
A market very favourable to sellers
The market was driven by rising prices and an appetite to buy secondary funds given a high dry powder, estimated at $125 billion by Greenhill and $110 billion by Credit Suisse. The historically high premiums on high-quality assets and significant reduction in discounts on the riskiest assets, illustrate a market that has become very favourable to sellers.
Liquidity that feeds transactions on a broader spectrum of assets
The secondary market is a very effective portfolio management tool for institutional investors and fund of fund managers. It is now opening up to new asset classes such as mezzanine and discounted debt, which offers sellers liquidity opportunities on traditionally less sought-after assets.
A very effective portfolio management tool
The secondary market has become very efficient with prices that secondary funds themselves consider to be good selling prices. According to Credit Suisse, the majority of secondary transactions are underwritten on IRRs between 9% and 13%, on an unleveraged basis. This level of gross return is well below past levels and reflects the strong current buying competition and efficiency of a market that has become highly organized.
2017 also confirmed the development of GP-led transactions, initiated by fund managers, which accounted for 24% of operations in 2017 according to Greenhill. These transactions offer a partial or total exit solution to historical investors in the fund via a transfer of the portfolio to a new fund. They can take place on underperforming funds, where governance is reviewed as part of the secondary transaction, or on performing funds to offer a liquidity solution for investors.
This note is a viewpoint of Essling Capital. It is intended to inform its readers in general and does not constitute investment advice or solicitation. Essling Capital declines all responsibility for any errors or omissions it may contain.
For further information, please contact us at the following address:
