Secondaries volume up 25% in H1 – research

Denise Ko Genovese
12 September 2019

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Setter Capital's latest research reveals a sizeable uptick in private debt deals, though private equity secondaries still dominate the market. Denise Ko Genovese reports

Global secondaries transactions reached $46bn in the first half of 2019, up 25.4% on the previous year, according to advisory firm Setter Capital's volume report published at the end of August.

A total of 895 transactions were carried out in H1, an increase of 20% in terms of number of deals done. Banks were the most active sellers, followed by pension funds, insurance companies and endowments.

"There has been meaningful growth in the market, driven by an increasing number of participants and larger funds being raised for secondary funds," says Setter Capital vice-president Larry Abraham-Ajayi. "More people have been embracing the market and using it proactively, taking advantage of relatively high prices. This all goes to show the market has evolved in the last several years."

In terms of geography, North America came in first for the volume of deals transacted ($26.42bn) followed by western Europe ($8.9bn), with the remainder in Asia-Pacific and the Middle East.

Most transactions came from private equity secondaries (funds and directs), which accounted for $42.10bn of deals done, up 33.5% on the same period in 2018. Broken down, PE fund secondaries were up 33.1% ($25.51bn in H1 2019 from $19.16bn in H1 2018), driven by the strong market for both LBO funds (up 24.5%) and purchases of VC fund stakes (up 51.5%), according to the report.

Real estate secondaries (funds and directs) were next in terms of volume at $1.9bn, though this number was down 39.2% on the previous year, as were hedge fund secondaries (down 35% compared to $340m in the first half of last year).

Banking on debt
Private debt secondaries made a notable appearance in the first half of last year and while only accounting for $2.2bn of the total number of transactions, the figure was an almost 280% increase on the $580m seen in H1 2018, according to the Setter report.

"The increase in private debt secondaries isn't large in absolute terms, but the fact that it has grown so much compared to 2018 reflects its growth as an asset class and the increasing number and sizes of private debt funds. As an example, we're seeing quite a number of PE firms venture into the private credit space by raising dedicated funds for this strategy," Abraham-Ajayi says.

Of the 120 respondents to Setter's survey, which formed the basis of the report, more than 50% said that GPs were instigating more tender offers to their LPs or had attempted to liquidate or restructure older funds. Almost 30% of respondents also felt that a notably higher number of GPs sought staples in H1 2019 compared with last year.

Setter noted that the lion's share of secondary activity in the first half of 2019 was driven by the 13 largest buyers in the market – identified as those deploying more than $600m. These deals accounted for 68.6% of the transactions, a small uptick on the 63% recorded in 2018. The slight hike was due to an increase in larger portfolios for sale and record amounts of capital raised by the big players, according to the report.

Almost all respondents surveyed said that competition for deals remained strong, with a total of 17% saying that buyers were using debt and leverage to stay competitive. Almost half of the respondents said that more deals were mediated, with Setter expecting an increase in these deals because of the uptick in the number of buyers.

"All other factors being equal, we expect H2 2019 to be equally strong. The fourth quarter is usually the busiest as people are eager to get deals completed, and we expect there to be a 2-3% overall increase on 2018 numbers by the end of the year," says Abraham-Ajayi.