The popularity of private equity as a way to diversify
portfolios has many investors searching the secondary market
for interests in buyout funds raised by firms such as KKR &
Co. and Blackstone Group.
These buyers will have to pay up due to the heightened
interest in the secondary market as way of gaining exposure to
private-equity. Pricing is particularly good at the
moment, said Patrick Adefuye, Preqins head of
secondaries, in a phone interview. He said the gap between the
net asset value of the stakes and the discount is at its
That means its a good time to be a seller on the
secondary market, where theres an abundance of buyer
interest. Private-capital secondaries funds raised a record $13.6 billion during the first
quarter, while private-equity firms are also on a tear raising
capital, according to financial data provider Preqin.
Buyers used to get bigger discounts to NAV several
years ago; the pricing has gotten closer to par as more money
has poured into the market, said Mike Earley, private
equity partner at Jones Day.
Andres Hefti, partner at Multiplicity Partners, adviser to
secondary buyers, says that while its true that for
assets like those owned by large private equity firms - think
KKR and Blackstone - buyers are paying par value,
those looking for deals tied to middle-market private-equity
firms are still able to find assets at a discount.
According to investment banking firm Greenhill & Co.,
secondary markets saw alternative-asset deals priced at an
average 89 percent of net asset value last year, a slight
decrease from 90 percent in 2015. Buyout funds again priced
higher last year than any other strategy, at 95 percent of NAV,
Greenhill said in a February statement, adding that it was a
100 basis point increase over the prior year.
Alternative-asset prices in the secondary market have
rebounded from the 2008 financial crisis, when private-equity
interests traded around 63 percent of their value, according to
Adefuye, citing Greenhill data.
Theres a lot of dry powder, Adefuye said.
Secondaries have raised to big funds - theres a lot
of money to put into the market. In the next two years there
will be increasingly more activity in the market.
Asset managers are attracted to secondary deals partly
because they have a clearer picture of what theyre buying
compared to when they contribute capital to private-equity
funds that have yet to make investments.
Secondaries on the surface are lower risk, Mathieu Drean, managing partner at Triago,
said by phone. They have assets you can
Investors like that they can see how deals are performing
under the ownership of a private-equity firm and that they only
have to hold the investment for three or four years, which
gives them greater liquidity, according to Drean.
Theres another aspect driving interest in the
secondary market. Some private-equity funds have held certain
assets for 10 to 12 years and are opting to invest more in
their deals, to continue building their value, rather than sell
them at a lower than expected return, according to Adefuye.
Instead of staying along for the ride, he said, some
private-equity fund investors become impatient to get their
money back and choose to sell their private-equity interests in
the secondary markets.
From the start of 2016 through March, nearly half a trillion
dollars have been raised for private-equity investment, driving
dry powder to a record $842 billion, according to a Preqin report. In the first three months of 2017,
buyout funds raised $54.4 billion, up from $50.1 billion during
the same period last year.
The private equity market as a whole has garnered more
interest in recent years, Earley said. The buyout
market has become more efficient. The same thing has become
true for secondaries - as more people realize there is good
money to be had there, that market becomes more