Lack of distributions continues to fuel secondaries

GPs are still calling on more capital than they are returning to LPs, according to recent research by Triago. The advisory firm expects calls to climb to 11% of committed capital in 2012 from 10% last year, with distributions dropping to 7% from 9%.

Granted, last year showed a healthy increase in divestment activity across Europe, as GPs faced the pressure of returning cash before raising a new vehicle – exit volumes increased by almost 20% from 2010 to 2011, according to unquote" data. But record amounts of dry powder following the 2008-09 drought meant managers were also ramping up their investment activity, particularly in the first half of 2011.

Triago managing partner Mathieu Dréan feels this factor partly drove secondaries activity last year and is likely to remain a feature in 2012 as LPs are looking to reallocate their funds to upcoming vintages or new strategies. "Distributions are still subdued, which partly explains the popularity of secondaries as they speed up the process and create much needed cash-back opportunities," says Dréan. "They therefore address a crucial point that still taints LP/GP relations: Duration. This is especially sensitive as the downturn has clearly led to longer holding periods, while at the same time a large number of GPs are asking their investors to re-up."

This trend is not expected to abate in the coming months as the exit market remains tough for GPs to navigate. "One should not expect divestment activity to significantly take off in 2012. There are still weaknesses in all exit channels. Many portfolio companies are not ready for a sale yet – their valuations are still too low to enable GPs to reap positive returns," warned Bain & Company associate Daphné Vattier while commenting on the firm's latest private equity outlook in a statement.

The secondaries option is even more tempting for LPs when sustained buy-side appetite means that discounts to NAV have barely been affected by last year's market turmoil and still sit firmly in the single digit range. Discounts widened slightly between September and December, reaching 8% on average, according to Triago. "We have witnessed an uptick in prices since then and current discounts are a couple of points below those seen in the second half of 2011," notes Dréan.

Distressed sales on the wane?
Liquidity and portfolio management issues aside, sales motivated by regulatory constraints still formed a major part of the secondaries market in 2011 – such sellers generated slightly more than half of overall dealflow last year, according to recent research by Coller Capital. Though it should be noted, not all firms selling their assets for regulatory reasons are distressed, and many are only willing to sell for the right price.

Dréan believes distressed sellers are likely to contribute less to the secondaries market in months to come as the most acute cases have already been – or will soon be – addressed: "Distressed sellers are a relatively minor source of dealflow. Other types of sellers are increasingly active in the market as the issue of portfolio maturity really takes centre stage."

In any case, secondaries players are looking forward to another busy year. The uptick should be less noticeable than the one witnessed in 2010, with several forecasts pointing to year-end figures in the region of $30bn compared to $25bn last year.

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• Topics
• Secondaries
• Industry
• Triago
• Coller Capital