Secondaries maintain value as volume predicted to reach record levels

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Strong interest has kept the average price in the secondary fund market within eight per cent of net asset value for nearly two years now, according to the recent Triago Quarterly, with a growing number of funds trading at par or better.

The return to favour of large US buyout funds in the secondary market has been particularly noteworthy, it said. Despite a 24 percent average increase in net asset value over the course of 2013, the average discount to NAV for the category stands at just one percent, up from seven percent at the end of 2012.

“With the exception of tail-end funds, where assets are frequently held for ten years or more, secondary investors — pushed in part by dissatisfaction with the slow deployment rates of primary funds — are focusing less on discount-generated returns and more on the faster turnaround and the relatively low risk of secondary portfolios.

“Some $50bn in dry powder for secondaries, regularly replenished by specialist general partners and the secondary pockets of funds of funds, should drive annual secondary volume more than 36 per cent higher to over $30bn in 2014. That will easily eclipse the 2012 record of $26bn.”

It also noted that some LPs, such as veteran private equity investors CalPERS and Yale,are trimming target allocations in an increasingly cautious approach to the asset class.

“The industry’s record amount of uninvested capital, near-record purchase price multiples and a growing conviction that target percentages can’t be maintained without lowering fund selection criteria are driving the caution. Those factors equally encourage innovation, pushing more capital to specialist funds, co-investment, direct investments and secondary transactions,” Triago added.
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