Campbell Lutyens’ secondary market overview: 4 takeaways

The 2019 Secondary Market Overview, compiled by the secondary advisory team at Campbell Lutyens, tracks market trends based on responses from more than 60 secondaries buyers. Below are some of the most striking findings from the report.

1. Big shift in buyer sentiment

Dramatic changes in buyer sentiment suggest the supply-demand balance is shifting away from sellers. Fifty-seven percent of buyers believe the secondaries market is inexpensive, compared with just 4 percent in last year’s report. There has also been a marked decrease in perceived competition on deals.

“All the buyers we’ve spoken to seem to be inundated with opportunities,” said Gerald Cooper, a US-based partner with Campbell Lutyens. “This gives them the latitude to be a little more selective in terms of which deals they go for.”

2. Strip sales top GP-led market

Strip sales emerged as the most popular type of GP-led process in 2018, accounting for 34 percent of the approximately $23 billion of value, according to Campbell Lutyens. Many GPs are locking in returns or crystallising carry in light of a likely market downturn, Cooper said.

The average size of a GP-led deal in 2018 was $65 million, showing that while $1-billion-plus deals grab the headlines, a vast majority of activity is at the smaller end.

3. Deferrals going out of fashion

The proportion of respondents that used a deferred payment mechanism dropped by 24 percentage points in 2018 compared with 2017. At the same time, the proportion of buyers using non-recourse debt – secured against the unfunded portion of the secondaries fund – has more than doubled since last year.

Growing competition and more favourable terms from lenders mean that many buyers are finding it cheaper to use third-party leverage than to agree a deferral, Cooper said.

“We’ve seen situations where a secondaries buyer will negotiate vendor financing on a deal and get a loan that sits behind it, so they don’t have to put any capital down on day one. Fifty percent of the purchase price is deferred for 12 months and you’ve got a loan from the bank for the other 50 percent.”

4. Staples becoming more weighted towards the secondary

The ratio of secondary to primary capital in stapled deals was 3.9:1 in 2018, up from 3.4:1 in 2017, meaning that for every dollar of primary capital put into a stapled deal, $3.9 was deployed on acquiring secondaries stakes in the tender offer. This implies that in 2018, more stapled deals were executed by less well-established or less well-performing managers. The best quality GPs are still able to achieve a ratio of 2:1, Cooper said.