Secondary Market Update Q All securities transacted through Sixpoint Partners, member FINRA/SIPC

Transcription

1 Secondary Market Update Q All securities transacted through Sixpoint Partners, member FINRA/SIPC

2 Secondary Market Environment 2

3 Executive Summary 2014 is shaping up to be a banner year for the private equity secondary market, driven by fund restructurings, spin-outs, direct secondaries and large bank and pension portfolios Clarity around the Volcker rule has partially driven volume in 2014 YTD The rise in GP-driven secondary processes has increased average deal size Despite record supply, Sixpoint expects pricing to remain buoyant in the near- to medium-term due to: Record secondary fundraising activity in Increased buy-side participation in the secondary market by traditional primary LPs Cash payments remain the predominant transaction structure, but alternative structures continue to gain ground, namely: Conventional structures, including deferred payments and profit-sharing arrangements Customized solutions, most notably a JV structure which a limited set of buyers can execute effectively This presentation incorporates the results of Sixpoint Partners 2Q Secondary Buyer Survey, supplemented by third-party data and research where applicable 3

4 % of Survey Respondents % of Survey Respondents Pricing Environment Encouraging High Transaction Volume Attractive pricing environment is inciting LPs to sell Current pricing is ~9+ for mature, diversified buyout funds generally Secondary pricing can be enhanced by pooling together at least 3-5 fund interests, creating a more diversified portfolio, and even further through a structured sale Historically large secondary dry powder is driving increased transaction volume Total secondary market deal volume is forecast to reach about $35 billion for 2014, representing a 2 increase over % of respondents to Sixpoint s survey report that deal flow for 2014 YTD is greater than the levels seen in 2013 With the Volcker Rule compliance deadline set for July 2015, we expect to see consistently high deal flow through 2014 and into 1H 2015 as banks continue to sell off private equity assets Secondary Deal Flow 2014 YTD Relative to 2013 Average Bid (as % of NAV) for Buyout Funds 5 45% 4 35% 3 25% 2 15% 1 5% A lot less 6% Somewhat less 21% About the same 36% 36% Somewhat more A lot more % 36% 54% US Buyout funds with vintages 2006-present price at 93% of NAV on average. Pre-2006 funds generally price in the mid-80s 80 or below Above Par Sources: Sixpoint Survey, Preqin, PEI Media 4

5 Billions ($) Fundraising Environment Following a record-breaking year for secondary fundraising in 2012, the 2013 total fell by 25% The pullback did not reflect soured interest in the asset class, but uncertainty regarding the implementation of the Volcker Rule may have delayed bank/bhc deal flow and dampened the fundraising market There are 26 secondary funds currently in market, targeting an aggregate of $20 billion Secondary fundraising is expected to rebound in 2014 in a big way, driven in large part by several mega fund closings Ardian Secondary Fund VI accounts for $9bn of the $14.1 billion raised so far in 2014 With several additional large funds set to close before year-end, Sixpoint s conservative estimate is that secondary funds will hold final closes on an aggregate of approximately $23 billion in 2014 With 48% of traditional primary LPs reporting that the secondary market is of core or growing importance in their private equity portfolios, fundraising totals for dedicated secondaries funds underestimate the amount of capital flowing into the market Annual Secondary Fundraising $ Sixpoint Year-end Estimate YTD YTD Sixpoint expects an increase of ~11% over 2012 the biggest fundraising year on record Sources: Sixpoint Survey, Preqin 5

6 % of Survey Respondents Seller Market Today s seller base is more diversified than in recent years In the timeframe, public pensions and banks were the sellers in 67% of secondary transactions In 2014, no single institution type comprises more than 14% of the secondary seller universe Limited Partners increasingly utilize the secondary market, with 42% planning to sell assets in the next two years Secondary sales facilitate the flight to quality seen in recent years, with 21% of LPs using secondary market transactions primarily to exit poor-performing funds; figures suggest as many as 7 use the secondary market at least in part for this purpose The size of today s secondary market provides LPs with liquidity at ever-smaller discounts Knowing that they can achieve liquidity-on-demand, LPs have gained increased comfort with the overall private equity asset class Potential LP Secondary Sellers by LP Type Seller Motivations Other Endowment Plan Insurance Company Investment Company Private Sector Pension 2 6% 7% 7% 7% 8% 14% 13% 11% 8% Asset Manager Public Pension PE Fund of Funds Bank & Investment Bank Foundation 45% 4 35% 3 25% 2 15% 1 5% 42% 27% Portfolio Rebalacing 23% 39% Liquidation Requirements % 21% Exit Poor Peforming Funds 6% Change in Strategy Sources: Sixpoint Survey, Preqin, Coller Barometer 6

7 Buyer Market Secondary market pricing remains buoyant due to a record volume of capital pursuing a more limited supply of product Traditional primary investors (e.g. public pensions, insurance companies and family offices) have entered the buyer market Hybrid buyers, specifically funds of funds and consultants, have emerged as preeminent players in the market, having raised dedicated secondary vehicles and separately managed accounts Non-traditional secondary buyers offer GPs the opportunity to gain wider LP exposure, benefitting primary fundraises % E Secondary Buyers Traditional Primary LPs - Public Pensions, Insurance Companies and Family Offices Hybrids - Consultants and FoFs Mega Secondary Funds Middle Market Secondary Funds 35% Lower Middle Market Secondary Funds The bid/ask spread for secondary interests will widen as supply/demand dynamics shift within the secondary market in the back half of 2014 New clarity around the Volcker rule will drive additional supply into the market, exerting downward pressure on pricing while increasing execution risk The increasing secondary pipeline of GP recapitalizations slated for 2H 2014 will add to the burgeoning supply and limit the available pool of stapled primary capital Sources: Preqin, PEI Media, Bloomberg Brief 7

8 % of Survey Respondents LPs in Tail-end Funds See Increased Interest in their Stakes GPs have leveraged the momentum in the secondary market to provide existing LPs with liquidity, while also securing extensions for tailend funds and attracting fresh capital for new investments via stapled commitments Pricing for GP-driven transactions varies greatly, given the concentration risk associated with a single portfolio and manager, as well as the quality of the unrealized assets and timetable for liquidity GP-driven secondary transactions will continue to drive a larger share of aggregate secondary deal flow Sixpoint estimates that nearly $100 billion of NAV remains in funds in their extension period or that will enter their extension period by year-end The sheer amount of fund commitments made in , i.e. over $1 trillion, will drive the restructuring/recapitalization segment through 2020 Proportion of Deal Flow (by $) that is GP-Driven Proportion of GP-Driven Deal Flow with a Primary Staple 44% 9% 3% % 41-6 >6 A majority of surveyed buyers report that GP-driven transactions account for more than 2 (by $ value) of their deal flow % 13% 3% Although the practice is gaining ground, only 16% of surveyed buyers report that 1/5 th or more of the GP-led deals they see involve a primary staple component 7% N/A Sources: Sixpoint Survey, PEI Media 8

9 Secondary Experience 9

10 Secondary Transaction Types Sixpoint has significant experience across a broad range of transaction types and structures Transaction Type Considerations Representative Sixpoint Buyers Fund recapitalizations Full and limited auctions Buy-side mandates Stapled primary sales Fund of funds wind-downs Bankruptcy processes Deferred payment structures JV/profit share structures Early secondaries ( pregnant primaries ) Solutions for GPs with a tail-end fund whose portfolio companies require additional time and/or capital to harvest Can be broad or narrow by design Ability to seek portfolio solution or mosaic pricing Best used for one-off fund interest transactions Typically a negotiated process Secondary purchase with simultaneous primary commitment Accretive for GPs with a fund in the market Liquidation of all the interests in a tail-end fund of funds Appropriate for very mature vehicles in extension period Requires broad auction, so that best market price is achieved Additional level of legal hurdles Portion of purchase price paid upfront, with the balance paid over time (e.g , ) Provides seller with upside participation No additional funding or fund administration for the seller Typically defined as funds that are less than 5 committed Arbitrage for secondary funds participating in a primary 10

11 Broad Coverage of the Secondary Buyer Universe Representative Buyers by Type Mega Buyers Hybrid Buyers Traditional Primary LPs Middle Market Lower Middle Market 11

12 Disclosure This document does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities. Sixpoint Partners, LLC is a registered broker/dealer member FINRA and SIPC. Offers of securities or investment advisory services may be made only pursuant to appropriate offering or other disclosure documents, and only after prospective investors have had the opportunity to discuss all matters concerning the prospective investment or engagement with their adviser, the issuers of the securities or Sixpoint Partners. 12