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In Tough Times, Private Market Secondaries Can Shine

Tom Burroughes Group Editor London 21 March 2023

In Tough Times, Private Market Secondaries Can Shine

The venture capital, private equity and other parts of the "private markets" space have been jolted by rising interest rates and, of course, the drama around Silicon Valley Bank. We talk to a Swiss firm playing in the "secondaries" market to find out how it approaches the field.

The drama around Silicon Valley Bank is likely to be giving private market investors a queasy sensation, even if they’re shielded to a degree from stock and bond market gyrations. Such episodes remind investors why liquidity matters, and how to obtain it.

Within the private markets space, an area that’s grown in recent years is “secondaries” – buying and selling pre-existing stakes in private equity, credit, real estate, and infrastructure. Such markets encourage price discovery, and the promise of more liquidity makes investors feel more comfortable about entering a field in the first place. The secondaries market accounted for $108 billion in volume last year, according to Jeffries, the investment and advisory firm.

“We look at late-stage buyout companies in areas such as logistics, supply chain [areas]…We like areas that are recession-resistant,” Chris Davies, managing partner of Bellevue Global Private, told this news service recently. His business, which he set up, is part of Bellevue Group, the Zurich-based investments group.  

Bellevue Global Private goes after what it sees as the most attractive segment within the private equity secondary market, a segment that is disregarded by many PE managers, at a time when the general market environment is favourable. 

“While large private equity secondaries players are not active in the $1 to $30 million transaction range, we believe this particular segment of the market is where the most attractive alpha-generating opportunities can be found,” Davies said.

With secondaries, there isn’t the “blind pool risk” of money put into a fund and not yet put to work; instead, investments are already at work, in companies that investors know, he continued.

The broader wealth and financial markets industry still needs to be educated about this market, why it matters and what its characteristics are. “It is a huge education piece and people are, however, understanding and getting into it,” said Davies.

The numbers are large. Investors’ portfolios, aka limited partners (LPs), made up 52 per cent of volume in secondaries last year, beating the share held by general partner-led deals for the first time since 2019. Jeffries reckons transaction volume is expected to rebound to $120 billion this year, and deployment of capital will be faster than the ability to raise funds.

In a recent note, Jeffries said: “We anticipate year-end audits will help reset private company valuations, and pricing for LP portfolios will slowly recover, with volume then increasing as bid-ask spreads narrow. Buyers will likely remain selective in the near-term, but even with a tough fundraising environment, we expect they will have enough fresh capital to deploy to match the pent-up supply we expect from sellers in 2023.”

The secondaries market is part of a wider story of busy activity in the private markets sector, reflecting how non-piublic investment has boomed because of a desire for higher returns to compensate for lower liquidity. The need to have such assets to diversify portfolios and capture sources of return has become a constant refrain. See examples of articles on the subject, from different regions, here, here and here.

From owner-managed to corporate
Davies said he likes secondary investments linked to daycare centres, nurseries and dentists – businesses that are sometimes owner-managed and need to be professionalised, consolidated and made part of corporate franchises. 
Davies  expects valuations in the secondaries market to come down this year and into 2024. “Some areas such as VC technology are going to struggle,” he said. There are some that “have a high cash burn.”

We have to talk about SVB
This news service asked Davies about any knock-on impact from the Silicon Valley Bank collapse.

“I think the bank run on SVB could have a number of implications (many of which are depending on the final outcome of the mini crisis and the implications thereof on the wider economy),” he replied.

For example, he said the run on SVB could lead to increased caution among banks about providing financing to private equity secondary funds, making it more difficult and expensive for funds to raise capital.

The collapse could also prompt regulators to “increase their scrutiny of the private equity secondary industry, leading to more rigorous reporting requirements and other regulatory changes that could increase costs for funds and limit their ability to operate”, Davies said.
“If SVB’s bank run leads to a broader loss of investor confidence in the financial system, this could reduce liquidity in the private equity secondary market. Investors may be more cautious about making commitments to funds, leading to a slowdown in fundraising and potentially putting pressure on asset prices (from which secondary investors would ultimately benefit),” he said.

“The collapse of SVB could lead to tensions and opportunities for the private equity industry, startups, and investors. While funding challenges and increased risk aversion could create difficulties, distressed asset acquisition opportunities, investments in undervalued startups, and increased deal flow could present opportunities for private equity firms looking to invest in the startup ecosystem,” he said.

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