Driven by banks and the resurgence of other LPs coming to the market, secondaries activity is likely to remain steady in the coming months. The recent market turmoil is however starting to impact pricing. Greg Gille reports

This week saw AXA Private Equity complete yet another sizeable secondaries transaction; along with LGT Capital Partners, the firm has acquired a €620m portfolio of LP interests in European buyout funds from HSH Nordbank AG. This marks a hat-trick of secondaries deals in recent weeks for AXA PE, as it also bought a $1.7bn portfolio of assets from Citigroup and a $740m private equity portfolio from Barclays in June.

Following a bumper year in 2010, secondaries activity is not expected to die down in coming months, driven hard by regulatory pressure on banks to dispose of large chunks of private equity commitments. But other sellers have been busy as well: "In addition to banks, who have been the sellers of the largest portfolios, we have over the last six to nine months seen the resurgence of long-term PE players using the secondary market as a portfolio management tool - notably funds-of-funds as well as insurance companies and pension funds. This is the first time we have witnessed this since 2007," notes Campbell Lutyens managing partner Andrew Sealey.

Indeed, managers of funds-of-funds nearing the end of their lifetime can be tempted to simply wrap those up and return money to their own investors. LPs also face the issue of large portfolios built over many years, as AXA Private Equity managing director Vincent Gombaud commented following the HSH Nordbank deal: "After banks have offloaded their portfolios, pension funds will be the next round of sellers. Their portfolios are not distressed, but very often pension funds have very small teams and it is difficult to expect them to manage around 200 GP relationships - some will look to rationalise their portfolios accordingly."

Administrative reasons aside, LPs increasingly use the secondary market to adjust the number of their core relationships. Says Sealey: "Some players have a number of legacy relationships where they will not invest in ongoing funds. As well as refining their strategy going forward, some of them are also looking to refine it going backwards by selling these fund interests."

Pricing concerns

Discounts for better quality assets have been for the most part in the single-digit region so far this year, but Sealey points out that the latest public markets turmoil is clearly having an impact on secondaries pricing: "The secondary market values against historic record dates; if pricing today is valued against March or June NAVs, discounts are likely to be wider by say around 10% compared to a five or six weeks ago, as asset values have fallen since then."

That said, Sealey remains optimistic regarding activity levels for the rest of the year: "Volumes might dip slightly in the fourth quarter but it shouldn't freeze as it did in 2009 - unless we see a significant further deterioration in pricing over the coming months. Even if the pricing is slightly off, banks will continue to be the major sellers in Europe going forward. Some other sellers may be more price-sensitive, particularly those conducting portfolio management exercises."