Activity in the secondaries market has ground to a snail’s pace as potential sellers of fund interests are reluctant to go the market with discounts to NAV as deep as 60 percent and buyers waiting on the sidelines for better quality assets.
The idea that the secondaries market will be slower in 2009 than it was in 2008 goes against the perception circulated by the mainstream media, which has been reporting since the demise of Lehman Brothers last fall that the secondaries market is a bargain-shoppers bonanza, according to expert presenters at PEI Media’s Active Portfolio Management Forum in New York Wednesday.
“There was about $20 billion in secondary activity last year, and there’s been about $2 and a half billion in secondary transactions this year,” said Ian Charles, a principal with Landmark Partners, a private equity and real estate secondaries firm. Charles was a member of a panel at the forum discussing the state of the secondaries market.
Cogent Partners, a Dallas-based secondaries market advisor, is in the process of selling 30 funds to 23 buyers, a deal that in the past would have gone to two or three buyers, said Todd Miller, a principal with Cogent, who spoke on the panel with Charles.
“We’re often getting one or two bids when we used to get 10 to 12 bids on any given asset,” Miller said. “Buyers are flocking to assets they know well. Some assets are getting no bids – we’ve never seen that. A good third of the assets we’re seeing are almost unsalable in today’s market.”
Several factors combined to grind activity in secondaries to a near-halt, delegates said. One factor is that sellers don’t want to sell at the steep discounts available on the secondaries market right now. “We’re probably at a 60 percent discount to [9/30/2008] NAV,” Miller said.
This is reluctance is sustained by the fact that many potential sellers are not feeling the liquidity pressure they thought they would, because GPs have slowed capital calls.
“A number of investors who thought they were in trouble are on the sidelines with fingers crossed,” Charles said. “They’re not motivated enough to sell.”
Also, there is a dearth of buyers right now on the secondaries market. Those actually buying secondaries assets are “non-traditional” buyers like sovereign wealth funds.
Forced sellers in the market today are mostly publicly listed funds of funds whose banks have pulled back on their credit lines, Miller said.
For activity to heat up in secondaries, general partners need to increase capital calls and net asset values need to drop, according to Jason Gull, partner with Adams Street Partners, a private equity fund of funds.