The 2019 Secondary Market Survey and Outlook report, compiled by UBS‘s private funds group, sheds light on how an increasingly competitive market is affecting investors’ expectations. Below are some findings from the report.
- Appreciable growth in GP-led buyer participation
The number of buyers participating in GP-led processes rose sharply last year. More than three quarters said they had participated in a GP-led process during the course of the year against 68 percent for last year’s survey, driven by past success stories and mountains of dry powder. UBS put GP-led deal volume at $25 billion, up from $16.1 billion in 2017.
- Shift in sellers’ motivations
Buyers said public market volatility/market correction would be the main driver of market volume in 2019, a factor that ranked second in last year’s survey. Single-asset transactions also entered the list at number four, while tail-end clean-ups dropped out of the top five.
“Since the end of 2018, with public market volatility increasing, there has been an added incentive to close deals quickly after bids have been accepted,” Joseph Zargari, a partner at law firm Morgan Lewis, told Secondaries Investor. “We have witnessed new closing conditions tied to the market’s overall performance, whereby a party may opt not to close if the market declines by a certain percentage since a given reference date.”
- Dry powder and deal volume approach parity
UBS estimates that last year’s deal volume for private equity, infrastructure and real estate was $75 billion. At the start of last year, there was $67 billion in dry powder, meaning a ratio of dry powder to deal volume of 1.04x, the lowest yet recorded. This narrowing in the imbalance of supply and demand could put pressure on pricing in 2019, the firm noted.
- More leverage providers, longer-term leverage
The number of firms able to provide leverage for deals continues to creep up, exceeding 16 last year. Just over half of buyers reported using deal acquisition leverage, compared with 42 percent in last year’s survey.
In the case of deferrals, while the average amount and duration are roughly in line with 2017, there was a marked increase at the top end of the range. Deals with a deferral period of 19 months or more have nearly doubled compared with 2017, and the number using leverage that accounts for 60 percent or more of purchase price is up by 4 percentage points.
“It is a seller’s market at the moment, so sellers are probably happy to receive part of the payment up front and the rest after a time period,” said Ian Wiese, origination director of fund finance at Investec Bank. Sellers are often remaining the owner of a portfolio until the last deferred payment is made to ensure they can settle any outstanding payments in the event of a problem, he added.
- Return expectations continue to drop
For LP stake sales, 59 percent of respondents expected a gross internal rate of return of 17.4 percent or lower, compared with 52 percent in 2016.
Return expectations for GP-led deals have also declined. Almost 80 percent of respondents expect a gross IRR of 22.4 percent or less, compared with 63 percent of respondents in 2016. As with LP stake sales, multiple expectations have declined but slightly. This is partly due to the use of fund-level credit lines, UBS noted.