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Cebile Capital Sees Resurgent Secondary Market

Despite the slow start in the first half of 2017, the secondary market turned up the gas in the second half of the year, reaching all-time record volumes of over $50 billion, according to Cebile Capital.

As demonstrated by 2017 trends, it is evident that the market is forking between smaller players and larger secondaries buyers with both investment and human capital resources to repeatedly source and process larger transactions. And even though transactions within

$250 million still characterise three-quarters of the market, larger players tend to complete fewer transactions, concurrently deploying more capital, notably in the GP-led space.

Pricing remained strong in 2017, with average pricing at 87%. It is a seller’s market, currently experiencing a flight-to-quality trend towards well-established and widely known funds. Discounts are aggressively moving toward par, and the quest for buyers is turning into finding the right balance amongst asset price appreciation, leverage and deal structuring, such as deferrals and earn-outs.

GP-led transactions are the man of the hour in the secondary market; an increasing number of secondary buyers, previously inactive in this space, are now entering the arena. The quality of GPs is still the defining requirement, followed by the alignment of interest and structuring.

In addition, tail-end portfolios, which once dominated the market, now struggle to meet return expectations. As more recent vintage funds are increasingly traded on the market, many tail-end portfolios have found themselves less sought-after by buyers, due to their limited upside potential, with less than 2% of the buyers completing the purchase of tail- end portfolios.

The most sought-after GPs, according to the survey, remain the usual suspects: CVC, Blackstone and Advent. EQT was a trending name in 2017, mainly driven by a GP-lead deal. In general, there is a growing appetite for European Buyout funds, suggesting the emergence of a geographical tilt in some investor preferences.

For 2018 Cebile Capital predicts that double-digit premiums for quality assets will become the new normal. This will be particularly true as it is expected that the use of leverage will rise next year, driving higher pricing and record volume.

The market outlook also anticipates that GP-led transactions will be headline news in 2018. Conservative estimates put market domination at 25%, but the actual figure could likely be closer to a third.