Asset AllocationJune 12, 2014

Institutional Investors Bullish on PE Secondaries

Private equity secondaries fundraising reached $13 billion year-to-date, more than triple that of 2013.

Reported by Featured Author

(June 12, 2014) — Institutional investors’ appetite for private equity secondary funds has been soaring so far this year, adding to competition and high levels of pricing, according to Preqin.

Data showed of the 60 asset owners surveyed in May, 48% said they see the secondary market as of “core or growing importance” to their private equity portfolios. More than 40% also said they had bought a fund interest in the secondary market in the past while only 16% said they’ve sold secondaries.

In accordance with such behavior, fundraising for secondaries has swelled so far in 2014. Preqin found eight funds closed in 2014 year-to-date raising a total of $13 billion, more than triple the $4.2 billion raised by six secondaries in the same period last year.

“2014 has already had a very successful start in terms of private equity secondaries fundraising, and it looks like fundraising for the year will surpass the lower level of capital raised in 2013,” Tom Friedman, Preqin’s chief commercial officer, said. The report found 27 secondary funds currently in the market looking to raise a total of $24 billion.

Investors cited the later-stage nature of the secondary market as the primary motivation for buying into the secondaries sector, as it removed exposure to loss-making periods often experienced by early-stage private equity investments.

Almost a third of the surveyed investors said access to top performing managers was also a motivator to dive into secondaries, Preqin said, reflecting a “more active and increasingly sophisticated” investor base looking to modify and improve portfolios.

Public pension funds made up the highest proportion of buyers, at 21%, followed by corporate pensions at 13%, according to the report.

In addition, Preqin argued the extraordinarily large amount of dry powder currently present in the private equity market could point to increased opportunities for limited partners to enter the secondaries market. The research firm said this cash could be put to use “buying out willing sellers and providing an injection of capital” into what are often dubbed “zombie” funds.

“Secondaries have established a viable, growing, and permanent role in the industry, delivering good risk-adjusted returns for their investors and helping the entire industry through the provision of greater liquidity in what is otherwise and illiquid asset class,” said Mark O’Hare, Preqin’s CEO.