Secondaries activity expected to pick up in H2 2020, says Cebile Capital

Crystal ball

With USD46 billion of dry powder available to deploy through year end, secondaries market activity is expected to increase in H2 2020, according to Cebile Capital’s Q1 2020 secondaries buyer report.

New figures also revealed that the private equity market expects a material decrease in sellers in the secondaries market, which will impact higher pricing in H2 2020.

“The record amount of dry powder available for secondary buyers to deploy coupled with innovative transaction structures will allow for robust secondary market activity in the second half of the year,” said Sunaina Sinha, managing partner at private markets advisor Cebile Capital.

Family offices, pension plans and financial institutions will make up most of the sellers in the market. A significant majority (90 percent) of respondents believe that Q1 valuations will be 10-30 percent below Q4 in private equity.

The survey aims to get an overview of the impact of COVID-19 on secondaries investing activity for the rest of the year.

With input from 76 secondaries buyers worldwide, the survey explores Q1 2020 activity and an outlook for the remainder of 2020.
 
Full year 2020 deal volume is expected to be in line with market expectations (between USD60 and USD75 billion). While COVID-19 led to 64 percent of buyers missing their deployment targets in Q1, secondary buyers expect to double down on their deployment pace in the second half of 2020.

Two thirds of investors expect to meet their deployment goals for 2020 - but 77 per cent of buyers expect a decrease in transaction supply for the rest of 2020.

This demand-supply imbalance should lead to attractive pricing for sellers of private equity stakes in the second half of the year, according to Cebile. 

Market volatility caused by COVID-19 has not impacted buyers’ investment strategy, the survey shows. Buyers’ views on deal types, risk profile and target returns remain largely unchanged compared to their expectations at the beginning of the year.

As buyers look to maintain their investment cadence, Cebile expects a 'flight to quality' where upside potential is easier to assess and downside risk protection exists.

Nearly nine in ten buyers, or 87 per cent, expect Q1 NAVs to be marked down between 10-30 percent in line with public market performance.

The evolution of secondary transaction structures will facilitate the consummation of transactions that would otherwise be impossible due to the wide discrepancy in prices buyers are willing to pay and offers sellers are able to accept.