Secondaries deal volume up 7% in 2019 – research

Global secondaries transactions reached $85.4bn in 2019, up 7.2% on the previous year, according to advisory firm Setter Capital's volume report for 2019, published at the end of January. The research represents 100 of the 118 most active and regular buyers of secondaries in the market, with the responses representing 96.1% of the deals done in the 12 months to the end of December 2019.

"The continued buoyancy in the secondaries market, especially the momentum in private equity remains due to investors wanting ever more exposure to alternatives, as well as an increased number of players and more capital to deploy," says Larry Abraham-Ajayi of Setter Capital.  

In terms of asset classes, private equity secondaries (funds and directs) continued to dominate with a 10.8% year-on-year (YoY) increase to $77.82bn worth of transactions. Infrastructure deals were also up 14.7% YoY to $3.45bn. Real estate secondaries dropped 36.9% to $3.69bn, as did hedge fund secondaries with a 37.1% drop to $290m.

"Hedge fund side pockets were largely created during the last crisis and those side pockets have now mostly been liquidated or wound down so the secondaries market in that segment has tapered off," says Abraham-Ajayi. "As for real estate, there were mega portfolio sales of LP interests [in the previous] year, hence the dip in that segment of the market last year."

Overall, 66% of the deals were for fund stakes compared to 34% being direct LP interests in underlying portfolios, according to the Setter report.

"We are starting to see secondary buyers doing direct deals or single asset secondaries rather than LP stakes given the increased competition for LP secondaries. People are getting more creative and trying to find proprietary deals/angles in their secondaries strategy," says Abraham-Ajayi.

Regarding the geography in which assets were bought, North America-focused funds and directs remains the biggest market, coming in first for the aggregate value of deals transacted ($50.14bn) followed by western Europe ($25.16bn) and Asia-Pacific ($6.10bn).

Agents were used for $60.6bn of the market's transactions, which in Setter's opinion is due to the increasing number of participants and new entrants in the secondaries space that need navigating.

Private debt surge
Within the private equity asset class (fund purchases), private debt secondaries made a notable surge; aggregate value amounted to $3.14bn, almost 105% more than the $1.5bn reported in 2018. LBO funds took the lion's share at $37.3bn, with VC secondaries following at $4.75bn, funds-of-funds at $2.9bn and energy at $1.77bn.

The total number of transactions in the secondaries market across asset classes was 1,597 in 2019, giving an average transaction size of $53.47bn. This was broadly in line with 2018 figures, which saw 1,595 transactions carried out, though the average deal size was 7% bigger in 2019 due to the number of transactions in excess of $500m.

The increasing breadth and number of buyers was noted in the Setter report, with the most significant activity driven by the largest buyers in the market. A total of 17 of the largest secondaries buyers deployed more than $1bn each, accounting for 72% of the market's total value, broadly in line with 2018 figures.

On the whole, the market is driven by the number of larger portfolios for sale and record amounts of capital raised by the biggest players, according to the Setter report. Also notable however is how buyers are diversifying within the asset class, with some purchasing infrastructure and real-estate secondaries for the first time in 2019.

Because of the increase in competition, the continued use of debt to meet pricing levels and deliver returns was noticed among those surveyed for the Setter report. None of the respondents felt that less leverage was used.

In terms of types of seller, fund managers dominated with 37.5% of deals sold by them; 22.7% were sold by pension funds; 8.5% were sold by insurance companies while 4.6% and 4.2% were coming from endowments/charities and sovereign wealth funds, respectively.

Looking ahead to 2020 volume figures, Setter estimates that there will be close to $90bn worth of transactions by year-end.

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