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Secondary market unsure about 2017 after 2016 contraction


Secondary deal volumes in 2016 were slightly lower than 2015, at USD37-40 billion, a result of a slow first half of the year caused by volatile public equity markets, low energy prices and macroeconomic concerns.

But as Cebile Capital’s annual ‘Secondaries Outlook’ report for 2017, reveals, activity levels rebounded in the second half of the year.
 
The secondaries market has become very popular with institutional investors, resulting in a record level of dry powder, at USD85 billion on a pre-leverage basis. Leverage remains readily available for market participants.
 
Considerable uncertainty appears to exist around the prospects for 2017, with 23 per cent of respondents expecting lower deal volumes and 24 per cent expecting a bounce. On average, the expectation is that secondary market deal volumes will be marginally lower than 2016, at USD35 billion, despite events such as Brexit and the US Elections receiving a more positive than negative response.
 
Overall the outlook for the secondary market is positive in the long term, with pricing holding up in 2016 amid a backdrop on intensifying competition for deals – all of which bodes well for sellers.
 
This sentiment was reinforced by the 74 per cent of market participants that expected their next fund would be larger than their current fund. A third thought their next fund would increase in size by more than 30 per cent. No respondents thought their future fund size would shrink.
 
Respondents named CVC, Blackstone, Advent and Bain as the world’s most demanded GPs in 2016.
 
In last year’s report there was little evidence of secondary buyers compromising on returns or using leverage aggressively in order to hit demanding price targets to win deals in an increasingly competitive environment. In 2016, however, there were the first signs of a movement away from traditional secondary market individual transaction return hurdles of 15 per cent-plus. Although 80 per cent of respondents still sought returns above 15 per cent in 2016 (down from 91 per cent last year), 12 per cent targeted IRRs in the 13-15 per cent range and 8 per cent were even lower (versus 0 per cent in 2015).
 
Opinion is divided over which area of the secondary market exhibited the most favourable risk/return profile in 2016. The most popular choice was the GP-led transaction, selected by 21 per cent of those surveyed, including firms of all sizes. 65 per cent of respondents reported seeing an increase in GP restructurings.
 
Sunaina Sinha (pictured), managing partner of Cebile Capital, says: “The secondary market emerged from 2016 in good condition despite two political surprises in its biggest economies. The uncertainty about 2017 is understandable, with public equity markets at record highs and regulatory disruption looming. 

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