Secondaries Funds Making a Comeback
Many investors view private equity as a long-term, illiquid investment. For the most part, core strategies are executed in seven- to ten-year windows. If private equity investors want to sell their positions before they mature, they turn to the secondaries market.
For the past two years, however, the secondaries market has not been an attractive option for sellers. The financial crisis of 2008 caused many private equity investors to suffer immense losses, which resulted in a huge number of distressed sellers entering the secondaries market. This, in turn, caused valuations and prices to tumble. Although private equity investors often sell their positions at a discount, these conditions were unprecedented. Unwilling to take such large losses, many investors decided to wait out the storm.
That, as we know, took longer than expected. By and large, investors used 2009 to recoup their investments. As a result, there was little activity in the secondaries market.
Today, however, as the economy shows signs of recovery, valuations have improved and many investors are once again looking at this market-not only to sell but also to buy.
In a recent study, 39 percent of investors said they anticipated increasing their allocations to secondaries funds over the next 12-18 months.1
This squares with BHA’s research data. Secondaries funds represented almost 25 percent of the total number of private equity mandates during the second quarter.
Secondaries funds are an important component of the private equity industry for managers and investors alike. Being able to liquidate positions helps many investors survive tumultuous times and it allows buy-side investors a chance for a profitable return. It is a good sign that this part of the private equity space is making a comeback.
1 AltAssets, “Investors bullish on private equity,” June 28,2010, http://www.altassets.com/private-equity-news/article/nz18544.html.