Distressed credit had biggest pricing increase in 2016

Secondaries investors have turned to investing in credit funds as they seek to shield themselves from an expected drop in the equity markets.

Distressed credit funds experienced the biggest increase in pricing last year as buyers sought protection against a possible fall in equity markets and buyout fund valuations, PDI sister publication Secondaries Investors has reported.

Average high bids for stakes in funds focusing on the strategy increased 8.12 percent in the 12 months to January, with buyers willing to pay as much as 90 percent of net asset value, according to a report by Setter Capital.

Pricing for buyout funds reached 96.6 percent of NAV, up 2.6 percent on January 2016, the report notes. Setter based the figures on the average top prices of the 90 days preceding January 2016 and January this year.

“My feeling is that the higher appetite for credit in general is creating a higher appetite for distressed despite it being more challenging to underwrite than more plain vanilla loans,” Setter’s managing director Peter McGrath told Secondaries Investor. “Credit funds [have also historically] performed well on a risk-adjusted basis versus buyout and buyers are realising [this] and wanting exposure, given where equity markets are with respect to downside risk.”

Despite recording the highest average IRRs and return multiples, venture capital funds were out of favour over the period, with prices falling 4.9 percent to an average high of 78.2 percent of NAV. This reflects the failure of large deals to deliver expected returns, according to Simren Desai, a vice-president at the Toronto-based firm.

“Valuations of late stage venture deals reached a peak in mid-2015 after a massive run-up in the preceding few years, and have plateaued since that time by most accounts,” Desai said. “Simultaneously many late stage deals have not delivered on aggressive growth projections that underpinned the valuations of their 2013 to early 2015 funding rounds. Since holding values by private equity funds lag the changes in value of the underlying assets, discounts to reported NAV rose.”

Desai said declining averages obscured the bright spots in VC. Some VC funds such as Benchmark Capital Partners VII, a 2011-vintage $425 million fund, have attracted bids of par or “massive premiums” in anticipation of continued rapid growth and potential IPOs, he added.

Growth funds were also favoured over the period, with buyers willing to pay 7.9 percent more over the year, to an average high of 88 percent of NAV.

Infrastructure funds also performed strongly, with buyers willing to pay an average high of 95.1 percent of NAV, the second-largest upwards price swing behind distressed credit funds at 8.10 percent.