Secondaries leverage hitting record levels – research

The increasing use of leverage in secondary transactions has become a much talked-about feature of the market in recent months, working in conjunction with record levels of dry powder to fuel a boom in the segment. Recent research by Triago highlights both the sheer transactional volume directly attributable to leverage, but also how average levels per transaction have skyrocketed in a short space of time.

Triago, a placement agent and secondaries adviser, has found that leverage – here including loans, deferred payments and preferred equity – accounted for an estimated 38% of the total secondary market value in 2018. This is a significant step up from the 23% recorded in the year prior, and highlights how far the market has come in the space of five years: in 2013, the estimated market contribution of leverage was just 4%.

As highlighted in Unquote's recent Secondaries in Private Equity report, leverage's positive impact on returns and the market's appetite for benchmarking partly explain the phenomenal rate of growth, as the practice becomes more widely accepted. Triago added that leverage is performing a crucial role in smoothing out the traditional cyclical nature of secondaries activity: "Previously, the aggregate value and number of secondary deals dipped significantly both during and in the immediate aftermath of public market sell offs," said a Triago spokesperson. "With leverage's turbo charge for returns largely absent from offers in past, cautious would-be buyers dropped prices so much that they found few willing sellers. Given the historical context, pricing in the secondary market has become remarkably stable."

It is therefore unsurprising to see both buyers and sellers more comfortable with leverage levels creeping up on a deal-by-deal basis. According to the Triago research, leverage accounted for more than half (52%) of the average transaction in the secondaries space last year. Again, this has been rising rapidly from a very low base: in 2013, that proportion stood at just 17%.

Banks and specialist funds have been quick to meet demand for these products, with Triago seeing Nomura, UBS, Lloyds, RBC, Natixis, Investec, MUFG and Macquarie as particularly active in that space on the bank side. Meanwhile, on the fund side, Whitehorse Capital, 17 Capital, Crestline and Fortress are go-tos when it comes to providing both credit and preferred equity for secondaries.

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• Topics
• Secondaries
• Financing
• Secondaries
• Triago