PREQIN SECONDARY MARKET UPDATE Q1 2018
PREQIN SECONDARY MARKET UPDATE, Q1 2018 FOREWORD In Q1 2018, five secondaries vehicles have successfully raised more capital than the 10 funds closed in Q4 2017 ($4.7bn vs. $3.7bn respectively). This was bolstered by the closures of Portfolio Advisors Secondary Fund III and Newbury Equity Partners IV on over $1bn each. At the start of Q2 2018, secondaries funds in market are seeking an aggregate $30bn. Although there are 34 secondaries funds in market, the majority (8) of the amount sought is concentrated among seven funds (and six managers). These include Lexington Capital Partners IX, which is seeking $12bn to make it the largest secondaries fund ever closed. Investors are showing a strong appetite for secondaries, and fund managers are successfully attracting capital: 83% of funds closed in 2017 exceeded their target, and all of the funds closed in Q1 2018 exceeded their target. The continued strong performance of secondaries vehicles relative to other strategies continues to underpin positive investor sentiment with respect to the asset class. Less than 2% of secondaries funds are currently delivering negative net IRRs, and the average median net IRR for secondaries funds across all vintages is 15.8% this is higher than the average for all private capital funds (+13.). The results of our secondary fund manager survey in January 2018 show that the secondary market is in good health: the desire for liquidity, the various portfolio management needs and a strong pricing environment drove activity in 2017, and this is expected to continue in 2018. This activity is supplemented by increasing opportunities from GP-led deals, with Q1 2018 seeing the first of this kind of transaction completed in Latin America. The majority (61%) of respondents expect to invest more capital in 2018 than they did in 2017, suggesting another active year for the secondary market. We hope you find this report useful, and welcome any feedback you may have. For more information about Preqin s online platform, please visit www.preqin.com or contact info@preqin.com. p3 p4 p5 p7 p8 p9 Fundraising Funds in Market Secondary Sellers Transactions Pricing Performance p10 Outlook for 2018 All rights reserved. The entire contents of Preqin Secondary Market Update, Q1 2018 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Secondary Market Update, Q1 2018 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Secondary Market Update, Q1 2018. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Secondary Market Update, Q1 2018 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Secondary Market Update, Q1 2018 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication. 2 Preqin Ltd. 2018 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/secq118 FUNDRAISING In Q1 2018, five secondaries funds held a final close, raising $4.7bn collectively, a considerably smaller amount than the record $20bn raised by 11 funds in Q1 2017 (Fig. 1). Despite the Q4 2017 slump (when only $3.6bn was raised), 2017 was a record-setting year for the industry and, driven by the flurry of activity in both Q1 and Q3, $43bn was secured overall. The largest secondaries fund closed in Q1 2018 was Portfolio Advisors Portfolio Advisors Secondary Fund III, which raised $1.5bn exceeding its original target of $1.0bn (Fig. 4). Newbury Partners closed the second largest fund of Q1 2018, raising $1.4bn for Newbury Equity Partners IV. All funds closed in Q1 2018 managed to exceed their original target (Fig. 2). This is a trend continued from 2017, where 83% of all funds closed above their targets, including 43% that raised 12 or more of their target. This emphasises the strong investor appetite for secondaries funds Fig. 1: Global Quarterly Secondaries Fundraising, Q1 2013 - Q1 2018 25 19.9 20 15 14.8 15 11.9 12.2 12.3 12.5 10.9 10 10.2 11 11 10 10 9 9 8 8 8 7 6.6 7 7 7 7 6 6 6.1 6.1 5 3 2 2.0 2.8 3.9 4.9 5 3.6 4.7 2.1 2.5 1.1 1 0.5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2013 2014 2015 2017 2018 Date of Final Close No. of Funds Closed Aggregate Capital Raised ($bn) currently, perhaps driven by the large amounts of dry powder in the industry: dry powder stands at $88bn, just below the record amount of $89bn seen in December 2017 (Fig. 3). Fig. 2: Secondaries Funds Closed by Proportion of Target Size Achieved, 2013 - Q1 2018 Fig. 3: Estimated Private Equity Secondaries Dry Powder, 2008-2018 10 9 1 100 90 89 88 Proportion of Funds Closed 8 7 6 5 5 5 43% 43% 6 4 7% 7% 32% 36% 2 9% 3% 9% 7% 3% 2013 2014 2015 2017 Q1 2018 12 or More 101-124% 10 50-99% Less than 5 Estimated Dry Powder ($bn) 80 70 60 50 40 30 20 10 0 23 Dec-08 37 36 Dec-09 Dec-10 52 Dec-11 41 Dec-12 45 Dec-13 53 53 Dec-14 Dec-15 74 Dec-16 Dec-17 Mar-18 Year of Final Close Fig. 4: Secondaries Funds Closed in Q1 2018 Fund Firm Fund Size (mn) Type Geographic Focus Portfolio Advisors Secondary Fund III Portfolio Advisors 1,500 USD Private Equity Secondaries US Newbury Equity Partners IV Newbury Partners 1,447 USD Private Equity Secondaries US GCM Grosvenor Secondary Opportunities Fund II GCM Grosvenor Private Markets 700 USD Private Equity Secondaries Europe Altamar Global Secondaries IX Altamar Private Equity 541 EUR Private Equity Secondaries US Euro Choice Secondary II Akina 300 EUR Private Equity Secondaries Europe 3
PREQIN SECONDARY MARKET UPDATE, Q1 2018 FUNDS IN MARKET At the start of Q2 2018, there are 34 secondaries vehicles in market seeking an aggregate $30bn (Fig. 5). Although there are three fewer funds in market than at the start of the year, these fund are seeking more capital than in January 2018 ($21bn). Of the secondaries funds currently raising capital, 47% have held an interim close on $3.9bn collectively. As shown in Fig. 6, the largest proportion (71%) of secondaries funds in market are primarily targeting North America, and the clear majority (86%) of capital is sought by North America-focused vehicles. There are three Asia-focused secondaries vehicles, seeking just $300mn in capital collectively. Fig. 5: Secondaries Funds in Market over Time, 2013-2018 (As at April 2018) 50 45 44 40 38 37 35 34 32 32 30 30 28 26 27 28 25 22 21 20 17 15 10 5 0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Apr-18 No. of Funds Raising Aggregate Capital Targeted ($bn) Of the secondaries funds seeking capital, there are four dedicated real estate vehicles, targeting an aggregate $5.6bn. There is also one infrastructure secondaries vehicle in market: Stafford Capital Partner s Stafford Infrastructure Secondaries Fund II is seeking $276mn for investment. The largest secondaries vehicle currently in market is Lexington Capital Partners IX which is seeking $12bn (Fig. 8); if this target is successfully met, the amount will surpass the previous record held by a secondaries vehicle. Fig. 6: Secondaries Funds in Market by Primary Geographic Focus Fig. 7: Secondaries Funds in Market by Fund Type 10 9 9% 1% 13% 10 9 3% 1% 12% 19% 8 21% 8 Proportion of Total 7 6 5 71% 86% Asia Europe North America Proportion of Total 7 6 5 8 8 Infrastructure Real Estate Private Equity No. of Funds Raising Aggregate Capital Targeted ($bn) No. of Funds Raising Aggregate Capital Targeted ($bn) Fig. 8: Largest Secondaries Funds in Market (As at April 2018) Fund Firm Firm Location Target Size (mn) Fund Type Fund Status Lexington Capital Partners IX Lexington Partners US 12,000 USD Private Equity Secondaries Raising Landmark Equity Partners XVI Landmark Partners US 4,000 USD Private Equity Secondaries First Close Landmark Real Estate Fund VIII Landmark Partners US 2,000 USD Real Estate Secondaries Raising Partners Group Real Estate Secondary 2017 Partners Group Switzerland 2,000 USD Real Estate Secondaries First Close Pomona Capital IX Pomona Capital US 1,750 USD Private Equity Secondaries Raising 4 Preqin Ltd. 2018 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/secq118 SELLERS Preqin s survey of secondary market buyers asked respondents to identify the perceived motivations for investors selling vehicles on the secondary market in 2017. As shown in Fig. 9, portfolio management (cited by 82% of respondents) and liquidity (the desire to realize capital from mature funds cited by 71%) remain the main factors for investors in the decision to utilize the secondary market to sell, as they were in the 2017 survey. Respondents were also asked to indicate which firm types they bought interests from on the secondary market in 2017. As was the case in 2017 s survey, family offices were the main supplier of deal flow, with 69% of respondents indicating they had bought from this investor type in 2017 (Fig. 10). North America continues to dominate secondary market activity, with 82% of respondents indicating they had bought interests from investors based there in 2017 (Fig. 11). The proportion of respondents that bought interests from Europe-based investors rose from 7 in to 79% in 2017, but the proportion of respondents buying from MENA- and Latin America-based investors fell from the previous year. Over half of respondents bought interests in small and mid-market buyout funds on the secondary market in 2017 (Fig. 12); however, the proportion buying mid-market buyout funds has declined from 76% in to 59% in 2017. As the market continues to cater for the needs of investors diversifying their portfolio outside of private equity funds, the proportion of respondents buying interests in infrastructure funds has increased from 11% in to 14% in 2017, and for private debt funds the proportion has risen from 16% to 19% over the same period. Fig. 9: Sellers Main Motivations for Selling Fund Interests on the Secondary Market According to Buyers, vs. 2017 9 8 7 6 5 74% 82% Portfolio Management 69% 71% Liquidity 54% 38% Change in Strategy 29% 29% 12% 12% Fund Performance Regulation 2017 Secondary Fund Manager Survey, January 2017-2018 Fig. 10: Firm Types from Which Buyers Bought Fund Interests on the Secondary Market, vs. 2017 8 7 6 5 69% 66% Family Office 44% 38% 38% 37% 34% 34% 34% 29% 31% 28% 22% 17% 19% 14% Bank/Investment Bank Private Sector Pension Fund Public Pension Fund Fund of Funds/GP Firm Type Foundation Endowment Plan Insurance Company Sovereign Wealth Fund 2017 Secondary Fund Manager Survey, January 2017-2018 Fig. 11: Location of Sellers from Which Buyers Bought Fund Interests on the Secondary Market, vs. 2017 9 8 7 6 5 82% 76% 79% 7 North America Europe 27% 27% Asia 1 11% 14% 12% 11% 3% Australasia Seller Location MENA Latin America Sub-Saharan Africa 2017 Secondary Fund Manager Survey, January 2017-2018 Fig. 12: Funds Purchased on the Secondary Market by Type, vs. 2017 8 7 6 5 76% 59% 59% 54% 49% 51% 51% 49% 43% Mid-Market Buyout Venture Capital Small Buyout Growth 24% 19% 19% 16% 16% 14% 14% 11% Large Buyout Private Debt Natural Resources/ Energy Real Estate Infrastructure 2017 Fund Type Secondary Fund Manager Survey, January 2017-2018 5
PREQIN SECONDARY MARKET UPDATE, Q1 2018 The majority (8) of secondary buyers indicated they had been sold funds of vintage 2009 or later (Fig. 13), perhaps illustrating the attractiveness of these funds due to the potential upside of having more time to mature. Mature funds of eight years or older, however, are still being purchased; half of respondents bought 2007/2008 vintage funds in 2017. Preqin s researchers maintain regular contact with investors to find out their plans for the secondary market. As at the end of Q1 2018, Preqin has identified 851 firms that are open to selling fund interests on the secondary market in the next 12-24 months. This figure has increased from 731 investors at the end of Q1 2017. As can be seen in Fig. 14, these potential sellers represent a diverse group of investors, including public and private sector pension funds and private equity fund of funds managers. The expected sellers are concentrated in North America (41%) and Europe (39%), with expected sellers also identified in Asia () and Rest of World (9%) including investors based in Australia, Brazil and the United Arab Emirates (Fig. 15). The majority (6) expect to sell buyout funds, and intend to sell venture capital funds, as shown in Fig. 16. However, such a diverse pool of firms will potentially bring a variety of funds to market. Fig. 13: Funds Sold to Buyers on the Secondary Market in 2017 by Vintage Year Fig. 14: Expected Secondary Market Sellers in the Next 12-24 Months by Firm Type Proportion of Funds 9 8 7 6 5 32% 32% 2004 and Older 3 5 5 41% 8 2005 2006 2007 2008 2009 2009 Onwards Public Pension Fund 13% Private Equity Fund of Funds Manager 13% Private Sector Pension Fund 11% Family Office 9% Insurance Company 9% Asset Manager 8% Endowment Plan 6% Foundation 6% Bank/Investment Bank Wealth Manager Investment Company 3% Government Agency 2% Secondary Fund of Funds Manager 2% 1 Vintage Year Proportion of Sellers Secondary Fund Manager Survey, January 2018 Fig. 15: Expected Secondary Market Sellers in the Next 12-24 Months by Location Fig. 16: Fund Types to be Sold by Expected Secondary Sellers in the Next 12-24 Months Proportion of Sellers 4 3 2 1 41% 39% North America Europe Asia Rest of World Proportion of Sellers 7 6 5 6 Buyout Venture Capital 29% Real Estate 24% Private Debt 19% 18% 18% Growth Fund of Funds Secondaries 12% Infrastructure Natural Resources Seller Location Fund Type 6 Preqin Ltd. 2018 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/secq118 TRANSACTIONS By all accounts, 2017 was a record year for the secondary market. When asked about their overall transaction activity, 59% of respondents indicated they had spent more on secondary transactions in 2017 compared to (Fig. 17). A sample of secondary transactions completed in Q1 2018 are shown in Fig. 18. The quarter saw the completion of a transaction that restructured three vehicles managed by Peru-based fund manager Enfoca investiones. The transaction, which had Goldman Sachs AIMS Private Equity as a buyer, is the first of its kind in Latin America, a region where GP-led secondary transactions are on the rise. Survey respondents were asked about their involvement in such deals in 2017 and, as can be seen in Fig. 19, 79% of buyers indicated they had completed a fund restructuring transaction in 2017, up from 62% in. Fig. 17: Change in Total Value of Secondary Transactions Completed by Buyers from to 2017 3 2 1 23% Significantly Increased Sixty-one percent of respondents 36% Slightly Increased indicated they had relied on secondary intermediaries for at least part of their completed deal flow in 2017, showing that 21% No Change 8% Significantly Decreased intermediaries remain an important aspect of the market (Fig. 20). 13% Slightly Decreased Secondary Fund Manager Survey, January 2018 Fig. 18: Sample Secondary Transactions Completed in Q1 2018 Seller Buyer(s) Fund(s) Sold Transaction Type Undisclosed Horsley Bridge Partners AFP Integra, AFP Prima, AFP ProFuturo, CPP Investment Board, Goldman Sachs AIMS Private Equity Strategic Partners Fund Solutions Enfoca Descubridor 1, Enfoca Descubridor 2, Enfoca Discovery 1 Apax Europe VI, Apax Europe VII, Litorina Kapital Fund IV, Segulah III, Segulah IV, Terra Firma Capital Partners II Fund Restructuring Fund Portfolio Sale BlackRock Private Equity Partners HarbourVest Partners Macquarie European Infrastructure Fund II Partial Sale Pictet Alternative Advisors Undisclosed European Secondary Opportunities II Sole Fund Interest Kaiser Permanente Pension Plan Laborers Pension Trust Fund for Northern California Infracapital Partners II, Pacific Road Resources Fund II Fund Portfolio Sale Fig. 19: Buyers Completing Non-Traditional Secondary Transactions, vs. 2017 9 8 79% Fig. 20: Proportion of the Total Value of Secondary Transactions Completed in 2017 Sourced from Intermediaries 4 39% 7 6 5 48% 21% 62% 34% 36% 17% 11% 2017 3 2 1 16% 8% 16% 21% Tender Offer Fund Restructuring Stapled Secondary GP Spin-out Secondary Fund Manager Survey, January 2017-2018 None Up to 2 26-5 51-7 76-10 Proportion of Total Value Sourced from Intermediaries Secondary Fund Manager Survey, January 2018 7
PREQIN SECONDARY MARKET UPDATE, Q1 2018 PRICING Recent strong fundraising and record dry powder levels have created a very competitive deal environment. Respondents to Preqin s secondary fund manager survey were asked for their observations on the level of competition for deals in 2017 compared to : the majority (61%) indicated they had observed more competition (Fig. 21). The perceived increase in competition is a sentiment reflected in pricing: at least half of respondents observed higher pricing for small, mid-market and large buyout funds in 2017 compared to (Fig. 22). The majority of respondents also observed higher prices for growth and infrastructure funds on the secondary market. Respondents were also asked to indicate the average price paid in 2017 for various fund types. As shown in Fig. 23, the highest average price tags are attached to large buyout vehicles, at 94% of NAV. Mid-market buyout funds were bought, on average, at 92% of NAV, and venture capital funds at 8 of NAV. Despite the higher prices observed in 2017, returns expectations for deals completed that year remain broadly similar to that for deals completed in : the majority of respondents (72%) anticipate multiples of 1.3-1.8x, a similar proportion for (77%, Fig. 24). Fig. 21: Change in Level of Competition for Deals from 2017 to 2018 According to Secondary Fund Managers 4 3 2 1 23% Significantly Increased 38% Slightly Increased 33% No Change Significantly Decreased Slightly Decreased Secondary Fund Manager Survey, January 2018 Fig. 22: Change in Secondary Market Pricing from to 2017 According to Fund Managers by Fund Type 10 9 8 7 6 5 5 46% 2 44% 5 54% 7 52% Small Buyout Mid-Market Buyout 4% 14% 8% 7% 8% 13% Large Buyout Growth 5 58% 32% 33% Venture Capital Real Estate 33% 6 Infrastructure 69% 6 23% 27% Private Debt Natural Resources/ Energy Lower No Change Higher Fund Type Secondary Fund Manager Survey, January 2018 Fig. 23: Average Price Paid (As a % of NAV) for Secondaries Funds Purchased in 2017 by Fund Type Average Price Paid (As a % of NAV) 10 9 9 8 8 7 7 94% Large Buyout 92% Mid-Market Buyout 86% 8 Growth Fund Type Small Buyout 8 Venture Capital Secondary Fund Manager Survey, January 2018 Fig. 24: Net Multiples Expected from Deals Completed, vs. 2017 5 4 3 2 1 Less than 1.0x 3% 43% 38% 34% 34% 28% 1.0-1.2x 1.3-1.5x 1.6-1.8x 1.9x or More 2017 Expected Net Multiple Secondary Fund Manager Survey, January 2018 8 Preqin Ltd. 2018 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/secq118 PERFORMANCE As seen in Fig. 25, secondaries funds continue to be seen as a safe investment: only two vintages (2006 and 2009) in the 11 vintage years shown have a negative minimum IRR, and, of all secondaries vehicles, just three currently have a negative minimum IRR. Secondaries funds typically have shorter holding periods, and, with funds purchased at discounts, provide attractive IRRs relative to other asset classes. This is illustrated in Fig. 26, which shows that median net IRRs for secondaries vehicles exceed the average private capital median net IRR for 2007 vintages onwards. Furthermore, Fig. 2 shows that secondaries funds have higher median net multiples than the average for all private capital funds for vintages 2008 and onwards. Fig. 25: Maximum, Median and Minimum Net IRRs of Secondaries Funds by Vintage Year Median Net IRR since Inception 7 6 5-2005 2006 2007 2008 2009 Vintage Year 2010 2011 Fig. 26: Median Net IRRs by Vintage Year: Secondaries vs. Private Capital Funds Fig. 27: Median Net Multiples by Vintage Year: Secondaries Funds vs. Private Capital Funds 1.8 2 1 Secondaries All Private Capital Median Net Multiple (X) 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 Secondaries All Private Capital 0.0 2005 2006 2007 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 2012 2013 Maximum Net IRR Median Net IRR Minimum Net IRR Secondary Fund Manager Survey, January 2018 Median Net IRR since Inception Vintage Year Vintage Year 9
PREQIN SECONDARY MARKET UPDATE, Q1 2018 OUTLOOK FOR 2018 The majority (6) of respondents expect to be involved in more secondary transactions in 2018 than in 2017 (Fig. 28) which, given that 2017 was a record year, bodes well for secondary transaction activity in the year ahead. Estimates for the total value of secondary transactions are shown in Fig. 29, which reveals that 41% of respondents are anticipating aggregate transaction activity of $45bn or more in 2018. Respondents were asked to qualify these estimates by indicating which factors might stimulate secondary activity in 2018, with 26% citing pricing and 19% citing strong public market performance, which translates to better valuations for privately held assets (Fig. 30). Other factors cited included investors portfolio management needs as well as the desire to obtain liquidity from mature vehicles. Respondents were also asked to indicate what trends they expected to see in 2018, and a noteworthy 42% expect to see more fund restructurings occurring (Fig. 31). Fig. 28: Fund Managers Expected Total Value of Secondary Transactions Completed in 2018 Compared to 2017 Fig. 29: Fund Managers Estimated Total Secondary Market Value for Full-Year 2018 4 39% 4 41% 3 2 1 21% 32% 3% 3 2 1 3% 12% 12% 32% Significantly More Slightly More No Change Significantly Less Slightly Less Less than $30bn $30-34bn $35-39bn $40-44bn $45bn or More Secondary Fund Manager Survey, January 2018 Secondary Fund Manager Survey, January 2018 Fig. 30: Fund Manager Views on Which Factors Will Influence Secondary Transaction Volume in 2018 Fig. 31: Fund Managers Expected Trends in the Secondary Market in 2018 Pricing Public Market Performance Portfolio Management Needs Liquidity/Unrealized Assets in Mature Funds Availability of Leverage 7% 11% 1 19% 26% 4 3 2 1 8% 21% 42% 8% Secondaries Dry Powder Macro-economic Factors 7% 7% Increased Deal Volume Increased Pricing More Fund Restructurings Increased Use of Leverage Secondary Fund Manager Survey, January 2018 Secondary Fund Manager Survey, January 2018 10 Preqin Ltd. 2018 / www.preqin.com
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