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Secondaries investors brace for valuations drop following booming 2021

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Secondaries market investors are bracing themselves for a drop in valuations as the rising interest rate environment and war in Ukraine create headwinds for the sector, data from Raymond James | Cebile Capital shows.

About 90% of respondents to the H1 2022 Secondaries Outlook Report said they expected a quarter-on-quarter drop, with around 20% expecting a decline of more than 10%.

Survey participants also noted a small shift towards a greater focus on developed markets with 10% expecting to reduce exposure to developing markets.

The expected dip comes on the back of a record year for secondaries dealmaking, with $130bn of transactions in the sector completed in 2021.

That was well above expectations of $100bn to $105bn from Raymond James | Cebile Capital’s prior secondaries market survey.

Market expectations for 2022 are for similar, albeit slightly higher, transaction volumes, it said, with estimates ranging from $110bn to $150bn.

The overall trend of an increasing proportion of GP-led deals has also continued, though 2021’s proportion of 50% was somewhat less than that of 2020 (60%).

The report said the secondaries market continues to exhibit a boom period, with fundraising reaching above pre-pandemic levels in 2021 with almost $40bn raised across 45 funds.

These levels remain below the record-breaking 2020 totals, however, which saw $80bn raised across 37 funds that year.

While the secondaries market has its roots in LP portfolio deals, 2021 saw a positive increase in the volume of single-asset transactions, which included strong performing assets where the investors saw meaningful upside.

The report said that the increased use of this deal technology was best exemplified by multiple $1bn-plus transactions in 2021.

It said, “While return expectations for these assets have not changed, many managers expect to focus more on LP portfolio opportunities in 2022 to support portfolio diversification.

“Approximately two-thirds of survey respondents are either capacity constrained or are only looking to add exposure to single-asset transactions opportunistically.”

Cebile Capital | Raymond James said that over the past year more than 80% of continuation fund vehicles had priced at a small discount (less than 10%) to a premium, with approximately 60% pricing at par or better.

It said this pricing reflects a meaningful improvement over 2020 pricing, when many secondary deals were completed at double-digit discounts.

Market attitudes towards several deal features remained consistent throughout 2021.

Roughly two-thirds of participants participated in deals with super-carry (top carry hurdle of >20%), of whom approximately one-fourth saw it in at least 25% of their deals.

Similarly, unfunded deal capital remained commonplace with approximately 85% of deals including at least 10% of the deal as follow-on capital.

Conversely, staples remain broadly unpopular with some 45% of respondents not accepting this feature in their deals and only circa 20% being open to providing a staple when there is a pre-existing relationship.

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