Secondaries players hold fire despite copious dry powder

According to a report by Campbell Lutyens, at the start of 2020 there was $103bn in dry powder to invest in the secondaries market – boosted to $147bn when including available leverage. This figure can be compared to $71bn (without leverage) in 2017.

"We actually thought there would be more dry powder coming into 2020," says Gerald Cooper of Campbell Lutyens. "One explanation is that 2019 was an active year for fundraising with many GPs coming back to market quicker than expected. LPs were inundated with reinvestment opportunities for their primary fund relationships, which likely crowded out some of the secondary funds seeking new capital."

But despite higher expectations, the figure is undeniably a large one, and with secondaries market players taking a moment to consider their strategies, the market could be bracing itself for a flurry of activity towards the fourth quarter.

Hold your breath
The general consensus is that secondaries transaction volume will stall until Q1 2020 valuations are available in May, at the very earliest, according to the Campbell Lutyens report. But it is possible that some will not venture out to trade before September, when Q2 2020 valuations are released, leading to a flurry of activity in the last few months of the year as funds seek to keep up with their previous deployment pace.

"Secondary buyers are hesitant to deploy capital in the current environment as it is not clear how severe write-downs will be once valuations are released for Q1," says Cooper. "Some buyers are starting to express a sense that the March NAVs won't fully reflect the impact of the crisis and they may seek to wait for Q2 marks. If investors see greater stability in the public markets, they might become active over the summer, but there's a chance that things don't pick-up until Q4, in which case it will be a pretty mad rush to get things done by the end of December 2020."

"If you look at the last crisis, when prices got really wide, there were no sellers of scale so valuations need to come down for pricing to become tighter and people can underwrite off a lower base."

Other struggles
Tail-end portfolios that have historically provided near-term cashflow will struggle this year, according to the report. This type of portfolio is typically sold for portfolio management reasons, but since they take time and effort, they will not be the focus in the current climate.

"There would be trades if sellers could get a good price, but tail-end funds are about 30% down at the moment so most prospective sellers will be holding off," says Cooper, adding that there will likely be greater pressure to sell younger vintages because of the underfunded capital commitments in those vehicles and the fact that net cashflow is shifting negative for the first time in a while, putting greater pressure on LPs that may already be feeling the pinch due to the denominator effect.

As well as tail-end portfolios, those with public market exposure and investments in highly cyclical sectors – consumer retail, transport, industrials and energy – will suffer the most first, the report added.

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