Private equity funds have been trading above par in secondary markets, with a low supply of deals during the pandemic helping to drive up pricing, according to Palico.
Investors paid an average 101 cents on the dollar for stakes in private equity funds in the six months through November, Palico found in its survey of limited partners. Secondary investors were willing to bid above funds’ net asset value after raising record capital to put to work in a market where buying opportunities dried up this year.
“There’s been a huge amount of money raised” to buy fund stakes as investors such as pensions and endowments look to the secondary market to increase their allocations to private markets, Claire Woolston Commons, Palico’s head of strategy, said Monday by phone. Demand has outstripped the supply of stakes up for sale, with secondary trading volume expected to drop this year due to the uncertainties surrounding the value of private equity holdings in the pandemic, said Commons.
With many potential sellers stepping back this year as they waited for “the dust to settle,” intense competition for top-tier funds pushed up pricing, according to Palico’s report on its survey. A fund raised by European private equity firm Nordic Capital Partners in 2018 attracted the highest bid over the past six months, at 114 percent of NAV, the report shows.
Sellers of funds with technology-related investments have stood out for captured premiums during the pandemic.
For example, a vintage 2016 fund raised by Summit Partners — a private equity firm that seeks deals in the tech, health care, fintech, consumer and industrial sectors — drew the second-highest pricing in the secondary market at 113 percent of NAV, according to Palico. And Francisco Partners IV, a $2.9 billion private equity fund that Francisco Partners Management raised in 2015 to invest in middle-market technology companies, had the third-highest pricing at 112 percent of NAV, the report showed.
Other private equity firms whose funds attracted strong demand included Silver Lake Management and Thoma Bravo, both of which focus on tech deals. Silver Lake Partners IV and Thoma Bravo Fund XI each drew pricing of 110 percent of NAV in secondary trading, the Palico report showed.
“Most people see a brighter future for companies with underlying technology elements to them,” said Commons, adding that the work-from-home trend during the pandemic has magnified the importance of tech.
Palico’s survey of secondary pricing covered a total of 35 private market funds. Most of the trading over the past six months involved growth equity and buyout strategies, said Commons.
While the majority of funds in Palico’s survey traded at par and above, 37 percent traded at an average 95 percent of NAV. Funds focused on energy were clearly left behind, said Commons.
For example, EnCap Energy Capital Fund IX-C, a 2013 fund managed by EnCap Investments, traded at 84 percent of its net asset value over the past six months, according to Palico. While the energy sector has struggled, Commons said some investors may view such funds as a distressed buying opportunity in the secondary market.