SECONDARIESspecial report 2017

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Secondary to noneOVERVIEW

Early figures indicate the secondaries market could hit fundraising and transaction records in 2017, Marine Cole finds

Secondaries powerhouse Ardian has had a busy year. In the first half alone, the firm sold two portfolios totalling nearly $2 bil-lion, completed the purchase of the largest stapled transaction ever – the $2.5 billion deal with Abu Dhabi’s Mubadala Capital – and was busy raising its latest secondaries infrastructure vehicle, ASF VII Infrastruc-ture fund, targeting $1.5 billion.

Ardian isn’t the only player taking a broader view of the secondaries market.

Take Landmark Partners. In April, the private equity and real estate secondar-ies firm provided preferred equity from its latest private equity vehicle to finance the purchase of a minority stakeholder in Clearlake Capital’s management company. It also bought €650 million-worth of stakes in a 2010-vintage European mezzanine fund managed by ICG.

This is testament to how diverse the sec-ondaries market has become. Increasingly, it’s not only traditional limited partners using the market to manage their portfolios. Sec-ondaries buyers, funds of funds and general partners – and not just the struggling ones – are taking advantage of secondaries trans-actions to manage their funds (see p. 50).

This diversification comes as the market is reaching new fundraising records.

In the first half of the year, at least $23.6 billion was raised by funds dedicated to the strategy, according to PEI data, slightly above previous high of $22.4 billion in H12016.

The three largest funds that closed in

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the first half of 2017 were Blackstone’s Strategic Partners Fund VII on $7.5 billion, AlpInvest Partners’ Secondaries Program VI on $6.5 billion, and Neuberger Berman’s NB Secondary Opportunities Fund IV on $2.5 billion, according to PEI data. Goldman Sachs is also nearing a final close on more than $7 billion for its Goldman Sachs Asset Management’s Vintage VII.

Some in the market fear there might be too much money flooding into secondaries, which could create a slowdown in fundrais-ing as returns dwindle.

“It’s going to put pressure on returns,” says Sunaina Sinha, founder and managing partner of advisory firm and placement agent Cebile Capital. “If returns fall it will be a concern for future commitments.”

But according to Sabina Sammartino, partner and head of the secondaries advi-sory team at Mercury Capital Advisors, the record-high fundraising continues to support a robust price environment and conditions remain favourable to sellers.

Average pricing for deals closed in the 12 months to June was around 94 percent of net asset value, according to a report by advisory firm and placement agent Campbell Lutyens.

Pricing is also being maintained by rising net asset values. It does, however, vary greatly depending on the quality of the GPs and the performance of the funds trading. Some of the best change hands at a premium.

“Given the strong level of competi-tion in straightforward LP portfolio

ON THE RISE

Secondaries deal volume ($bn)

Source: Greenhill Cogent

27.52013

422014

402015

372016

22H1 2017

Source: Campbell Lutyens’ June Survey

A NEW RECORD

Secondaries fundraising ($bn)

Source: Private Equity International

10.45

16.8717.34

12.2511.93

8.73

22.38

10.25

23.58

H12013

H22013

H12014

H22014

H12015

H22015

H12016

H22016

H12017

GETTING PRICEY

Secondaries buyers on the current environment

2% cheap

24% fair

74% expensive

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transactions, secondaries investors have to be more innovative and are increasingly looking at new types of transaction, new sectors, and new ways of delivering target returns to their investors,” Sammartino says. “We’re seeing a broadening in the types of investments, which is a positive development.”

Deal volume is also growing after a slight dip in 2016, with $22 billion-worth of transactions closed in the first half of the year, according to data from Greenhill Cogent. Market participants are anticipat-ing a record year for deal activity, particu-larly fuelled by US transactions.

“Global secondaries volume was up meaningfully in the first half of 2017 relative to the first half of last year, with an increase in the number of $1 billion-plus portfolios brought to market,” says Andy Nick, a man-aging director with Greenhill.“Given that the second half of each calendar year has historically been busier than the first, we anticipate that secondaries volume for the full year could exceed $40 billion.”

Typical sellers have included public pension plans and university endowments, which are continuing to actively manage their portfolios, while primary funds of funds, separate account managers and certain secondaries buyers are increas-ingly selling to liquidate and wind down older funds.

“This year,there has been an increase in the liquidation of mature funds of funds, which are seeking to lock in gains and manage the ultimate liquidty of older vin-tage funds,” says Verdun Perry, senior man-aging director and co-head of Blackstone’s Strategic Partners.

Like many in the industry, Perry is relaxed about the amount of dry powder available for secondaries, pointing out the market only has between two and two-and-a-half years of supply available, compared with five to six years in the primary market.

“Secondaries supply and demand char-acteristics are well within reasonable range,” he says. “We’re still in a relatively comfortable investing environment.”

Indeed, there’s no indication that deal volume will slow down.

“Outside of the increasingly diverse investor base that is accessing the second-aries market, the fund of fund managers which raised capital in the 2003-07 time frame are approaching their final exten-sions. The growing desire for liquidity from underlying limited partners coupled with pending term expirations should drive additional secondaries buying opportuni-ties from these funds of funds over the next several years,” Perry says.

The rise comes against a background of continued high distributions to LPs, which are struggling to find opportunities to reinvest their cash. If distributions fall, some LPs may be more in need of cash and increase their use of the secondaries market to sell non-core fund commitments.

Additionally, the bulk of the activity continues to focus on pre-crisis vintages – the average vintage of funds sold is 2007. Although the market will see fewer pre-crisis vintages trading, funds from 2011-13, which were busy fundraising years, will sus-tain healthy dealflow for the next few years.

Overall, secondaries market participants are confident that 2017 will be another strong year. At this point, only a public market correction could derail that, and even that isn’t dampening spirits.

“If you have a big correction in the equity market, I think the volume will slow down for six to nine months at least,” says a secondaries buyer. “But a big dislocation would be a challenge and an opportunity.” n

Given the strong level of competition

in straightforward LP portfolio transactions, secondaries investors have to be more innovativeSabina Sammartino

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FUND MANAGER HEADQUARTERSAMOUNT RAISED ($M)

1 vw Ardian Paris 31,580.89

2 p Blackstone Strategic Partners New York 16,800.00

3 q Lexington Partners New York 16,491.20

4 p Goldman Sachs Asset Management New York 14,146.00

5 q Coller Capital London 12,650.00

6 vw HarbourVest Partners Boston 12,420.35

7 p AlpInvest Partners Amsterdam 11,969.51

8 q Partners Group Zug 10,436.00

9 q Landmark Partners Simsbury 10,010.70

10 q LGT Capital Partners Pfaeffikon 7,262.27

Source: PEI

TOP 10 FIRMS BY CAPITAL RAISED, AND ...

A sector on the upTHE SI 30

Record raises and deals have characterised the 12 months since our first ranking of the top 30 managers, writes Adam Le

The top 30 secondaries managers over the last five years have raised an eyewatering $190 billion in that period.

But the figure should come as no sur-prise to anyone keeping a keen eye on the market. In the 12 months since we pub-lished our debut SI 30 ranking – which tracks capital raised in the last five years – several records have been broken. Forprivate equity secondaries alone, fundrais-ing hit a first-half high this year of$24billion, bolstered by at least seven finalcloses above $1 billion.

This year, again, the market leader is clear: Ardian. The firm broke the infrastruc-ture secondaries record by raising $1.7 billion for ASF VII Infrastructure, and in the last five years it has amassed almost double the amount of capital as second-placed Strategic Partners.

“Secondaries has come of age,” says Benoît Verbrugghe, Ardian’s US head. Major institutional investors are using the market, which has long shed its ‘distressed sellers only’ image. “There is still plenty to come from the secondaries market, particularly as the private equity indus-try grows.”

At least nine of the 30 firms that made our ranking this year are fundraising, a sign LP appetite for secondaries is yet to reach a peak.

Five join our ranking for the first time: Intermediate Capital Group, Montauk TriGuard, Aberdeen Asset Management, Altamar Private Equity and Stafford Capi-tal Partners. Many of these firms focus on niche strategies such as restructurings and real assets.

“A lot of secondaries funds are trying

their best to differentiate themselves in different parts of the market,” says Mark McDonald, global head of secondaries advi-sory at Credit Suisse’s private fund group. “Mega-funds are writing $1 billion-plus cheques to buy very large LP portfolios, and you’ve got small niche funds trying to do smaller, quirkier, off-market direct sec-ondaries and GP-led deals.”

DRY AS A BONE

Dry powder estimates range from $68 billion to $83 billion, according to advi-sory firms Evercore and Greenhill Cogent respectively, which means market partici-pants are having to push innovation and make creative deals. These include Harbour-Vest Partners’ take-private of SVG Capital, Ardian’s $2.5 billion stapled deal with Abu

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FUND MANAGER HEADQUARTERSAMOUNT RAISED ($M)

11 vw NB Alternatives New York 5,643.51

12 vw Pantheon Ventures London 5,229.12

13 p Hamilton Lane Bala Cynwyd 3,572.15

14 q Madison International Realty New York 3,253.95

15 p Adams Street Partners Chicago 2,967.42

16 q Portfolio Advisors Darien 2,657.00

17 p Pomona Capital New York 2,646.30

18 q DB Private Equity Cologne 2,268.00

19 q SwanCap Partners Munich 2,217.40

20 p JPMorgan Asset Management New York 2,028.80

21 p Morgan Stanley Alternative Investment Partners West Conshohocken 1,990.42

22 q Committed Advisors SAS Paris 1,827.36

23 p Newbury Partners Stamford 1,800.00

24 q Industry Ventures San Francisco 1,433.85

25 v Intermediate Capital Group London 1,169.40

26 v Montauk TriGuard Irvine 1,165.00

27 v Aberdeen Asset Management Aberdeen 1,098.58

28 p StepStone Group New York 1,043.85

29 v Altamar Private Equity Madrid 1,034.90

30 v Stafford Capital Partners London 1,022.12

Source: PEI

... THE BEST OF THE REST

SI 30 METHODOLOGY

How we determine the 2017 rankingThe SI 30 ranking is based on the amount of equity capi-tal raised for dedicated secondaries pools of capital over a roughly five-year period. This year, the window spans from 1 January 2012 to 30 June 2017.

Accuracy, confidentialityWe give highest priority to information that we receive from or confirm with the fund managers themselves. When secondaries firms confirm details, we seek to “trust but verify”.

Some details simply cannot be verified by us and in these cases we defer to the honour system. In order to encourage co-operation from secondaries fund managers that might make the SI 30, we do not dis-close which firms have aided us on background and which have not. In the event we do not receive confir-mation of details from the firms themselves, we seek to corroborate information using firms’ websites, press releases, news reports and limited partner disclosures, among other resources.

Definitions Secondaries capital: For the purpose of the Si 30, the definition of secondaries capital is: capital raised for a dedicated programme of investing directly into the secondaries market. This includes equity capital for di-versified private equity, real estate, infrastructure, buy-out, growth equity, venture capital and turnaround or control-oriented distressed secondaries investment op-portunities. We also count any portion of a fund of funds earmarked specifically for secondaries investments.

Capital raised: Capital definitively committed to a sec-ondaries direct investment programme. In the case of a fundraising, it means the fund has had a final or official interim close after 1 January 2012. We count the full amount of a fund if it has a close after this date. We count the full amount of an interim close (a real close, not a ‘soft-circle’) that has occurred, even if no official announcement has been made. We also count capital raised through other means, such as co-investment vehicles.

What does NOT count as secondaries?Direct private funds: We do not count capital raised for funds that invest directly into the primary markets, wheth-er this be for private equity, real estate or infrastructure.

Hedge funds: We do not count hedge funds, meaning funds that target liquid securities or trading strategies.

Opportunistic investors: Some large entities have the ability to carry out secondaries deals on an opportunis-tic basis. We do not count these groups because there is no hard capital allocation to their direct-investment programmes.

Debt, including mezzanine debt funds: We only count equity investment funds for this ranking. All debt funds, including mezzanine debt funds, will not be counted towards the ranking.

PIPE investments: The Si 30 counts private capital raised for secondaries investments. Therefore, we do not count capital raised for PIPE deals.

Deal-by-deal: We do not count capital raised on a deal-by-deal basis to be invested into secondaries opportunities.

Dhabi’s Mubadala Capital and BC Partners’ stapled process to aid fundraising for its 10th flagship buyout fund.

“Increasingly you’re seeing transactions happen with these higher quality GPs with good assets and bigger portfolios,” says David Atterbury, managing director at Har-bourVest Partners. His firm is one of the 12 GPs in the SI 30 that held final closes in the 12 months to June, amassing $4.8 billion for its Dover Street IX fund.

“There’s a big market out there in terms of funds that are in year eight, nine or 10 of their lives, and there is demand from investors into secondaries funds to access that market.”

Taking that into account, and with pri-mary dry powder at $1.5 trillion, the peak for secondaries fundraising could be some way off. n

v Not present in 2016

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Switzerland EUNorth America UK

Location, location, locationSI 30

Where the big fundraisers are headquartered

Blackstone Strategic Partners$16.80bn

Lexington Partners$16.49bn

Goldman Sachs Asset Management$14.15bn

HarbourVest Partners$12.42bn

Adams Street Partners$2.97bn

Hamilton Lane $3.57bn

Ardian $31.58bn

AlpInvest Partners $11.97bn

Partners Group$10.44bn

LGT Capital Partners $7.26bn

Coller Capital $12.65bn

Pantheon Ventures $5.23bn

Landmark Partners$10.01bn

NB Alternatives$5.64bn

Madison International Realty$3.25bn

Portfolio Advisors$2.66bn

Newbury Partners$1.80bn

Montauk TriGuard $1.17bn

Intermediate Capital Group $1.17bn

Committed Advisors SAS $1.83bn

StepStone Group $1.04bn

SwanCap Partners $2.22bn

Aberdeen Asset Management $1.10bn

Altamar Private Equity $1.03bn

Industry Ventures $1.43bn

DB Private Equity $2.27bn

Stafford Capital Partners$1.02bn

Pomona Capital$2.65bn

JPMorgan Asset Management $2.03bn

Morgan Stanley Alternative Investment Partners

$1.99bn