Private Capital Secondaries Expected to ‘Rebound Significantly’

After a very modest first half of 2019 for the private capital secondary market in terms of fundraising, prospects for the second half of the year are promising as a number of large funds are currently in market, according to financial data and information provider Preqin.

The data from Preqin showed that during the first half of the year, only seven secondaries funds raised $2.4 billion at final close, which is well off the pace from 2018, when funds raised almost $30 billion. The average size of funds closed was also down, falling by more than half to $395 million during the first half of the year, compared to $876 million in 2018.

Preqin said the sharp drop in secondaries fundraising underestimates the overall strength of the fundraising market. The firm said several large funds are currently in market, and many have already held at least one interim close. It said that in total, there are 51 secondaries funds seeking a combined $77 billion, the majority of which plan to focus on private equity stakes.

“Although fundraising has dipped in the first half of the year, it seems to simply be a lull after the record-breaking fundraising volumes seen in 2017-18,” Patrick Adefuye, Preqin’s head of secondaries, said in a statement. “As funds currently in market hold final closes, we would expect fundraising for the full-year to rebound significantly.”

Adefuye said secondary funds offer attractive returns, and that most have cash flow projections on much shorter timescales than other private capital strategies.

“There are also increasing opportunities for fund managers to put capital to work, although competition is increasing,” he added, “it will be a key test to see if fund managers can maintain returns in the face of pricing pressure.”

On the deal-making side, record transaction volumes from 2018 have continued through the first half the year, with potential buyers outnumbering sellers, said Preqin, which added that the opportunities coming to market are increasingly diversifying from buyout strategies into other areas of the private capital market.

Private and public pension funds each represent the largest proportion (13%) of sellers within the secondary market. And for potential buyers, buyout (68%) and venture capital (58%) represent the largest pools of funds available on the secondary market, according to Preqin.

Preqin said that the secondary market is in a healthy state for the second half, that transaction volume has accelerated, and that it expects the growth to continue. However, it said that this is provided there are no further economic and political shocks, which is certainly no guarantee based on the way the markets have been gyrating this year.

The firm also pointed out that the market has shown strong growth, as only 15 years ago, the largest fund dedicated to secondaries investments totaled $2 billion, while in 2019, the largest secondaries fund being raised has a target of $18 billion. That would be the sixth-largest private equity fund ever raised, according to Preqin. It also said that since 2013, annual transaction volume in the secondary market has grown at a compound annual growth rate of approximately 40% to an estimated $75 billion last year.

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