Fundraising Plunges for Private Capital Secondaries Funds

Investor appetite for secondary investments remains strong despite the fundraising lull, according to Preqin.

Illustration by II

Illustration by II

Fundraising for private capital vehicles focused on secondary markets plummeted during the first half of 2019, as investors take a breather from pouring money into the strategies, according to Preqin.

The funds raised $2.4 billion globally this year through June, down 83 percent from the first half of 2018, a Wednesday report from Preqin shows. Private capital managers attracted about $30 billion for secondaries funds last year, after raising a record $44 billion in 2017.

The majority of secondaries funds now seeking capital are focused on private equity investments, according to the report. These funds buy stakes in funds that invest directly in private capital deals, with private and public pensions making up the largest single portion of sellers.

“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, head of secondaries at Preqin, said in a statement Tuesday. “As funds currently in market hold final closes, we would expect fundraising for the full year to rebound significantly.”

Despite the lull, prospects for fundraising in the second half of the year remain promising, according to Preqin.

The firm estimates that 51 secondaries funds are aiming to raise a total $77 billion, with private equity-focused strategies representing $72 billion of that combined target. For example, Lexington Partners and Ardian are raising the largest secondaries funds, each targeting $12 billion, the report shows.

“Appetite for buying and selling fund interests on the secondary market has remained strong in the first half of 2019,” Preqin said. Buyout and venture capital represent the largest pools of funds available for potential buyers in the secondary market, the firm said.

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Net internal rates of return for secondaries funds dating from 2007 to 2015 have exceed gains produced from direct private capital pools, according to Preqin. For example, vintage 2015 secondaries funds have the highest median net IRR at 24.8 percent, the data tracker said.

While Preqin sees increasing opportunities for fund managers to put capital to work, the data tracker said that industry competition is also on the rise.

“It will be a key test to see if fund managers can maintain returns in the face of pricing pressure,” Adefuye said.