Tail-end funds fuelling secondaries boom

The secondaries market worldwide has been in rude health in recent months. Various estimates by market players put last year's total in the region of $50-60bn, and a recent report by secondaries adviser Setter Capital put aggregate value at $36.7bn in the first half of 2018 alone – a 26.2% increase on the estimate published in H1 2017.

Another recent piece of research, by placement agent and secondaries adviser Triago this time, sheds some light on a growing driver behind this trend. According to the firm's estimates, the market share of tail-end funds (defined as funds with a 10-year-old vintage or older) as a proportion of all secondaries activity has picked up significantly in the past few years, especially when looking at it in terms of number of transactions.

Fund-of-funds managers are cleaning out their older vintages from the early- to mid-2000s, fuelling the influx of tail-end fund stakes on the market" – Mathieu Dréan, Triago

In 2012, such end-of-lifespan vehicles accounted for 29% of all transactions (12% in aggregate value terms) - this increased steadily to reach 37% in 2015, for 15% of aggregate value. But the real jump occurred in 2016, when Triago put the market share in volume terms at 48%. It reached 57% last year, and the estimate for the first half of 2018 is that nearly two thirds (63%) of fund stakes traded worldwide were for tail-end vehicles, accounting for a quarter of the transaction value total. Triago based its research on a mix of data from its sell-side advisory mandates and regular polling of market players.

A large part of this activity is of course individual LPs seeking liquidity from fund investments made at the peak of the previous fundraising boom in the mid-2000s. But, speaking to Unquote, Triago managing partner Mathieu Dréan highlighted another key driver behind the trend: "Fund-of-funds managers are also cleaning out their older vintages from the early- to mid-2000s, fuelling that influx of tail-end fund stakes on the market. They want to get ahead of the curve, before their own LPs start trading their positions in the funds-of-funds."

A third factor is that GPs themselves are being more proactive, with manager-led processes allowing them to offer liquidity to their investors in neat, PR-friendly processes. But, despite the likes of Nordic Capital and BC Partners running landmark processes in recent months, Dréan points out that this remains the exception rather the norm for tail-end funds.

Perfect storm
This variety of drivers on the supply side hints at a more structural evolution of the market as these transactions become more widely accepted. This is compounded by growing demand from buyers as well.

"These situations are a good fit for a certain profile of investors making up a significant part of the secondaries market on the demand side," says Dréan. "Buying into a tail-end fund implies a short investment duration, roughly between 12 and 36 months, which fits certain buyers. And multiples may not be high, but that short hold means that IRRs are usually high and this is very attractive for secondaries specialists, as well as certain institutional investor with specific needs."

This appetite on the buy-side means that while discounts are inevitable, they remain reasonable and it isn't rare for the best assets to stay within single-digits - which in turns can only encourage sellers in the coming months. According to Dréan, these structural factors should ensure that activity remains high in the foreseeable future, especially as a number of opportunities are yet to hit the market: "It isn't rare to see early-2000s funds still being traded at the moment. And looking at funds-of-funds offloading their portfolios, we are not even up to the 2006-2007 vintages yet, so this trend should continue in the coming months if not years."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• LPs
• Fundraising
• Top story
• Secondaries
• Triago