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Secondaries Market and its Performance during Pandemic
The buy-and-sell of pre-existing investor commitments to private equity and other alternative investment funds is referred to as the private-equity secondary market. Transferring interests in private equity and hedge funds can be more complicated and time-consuming due to the lack of established trading venues for these interests. Private equity has traditionally been an illiquid sector, with institutional investors acquiring buyout funds and waiting more than ten years to enjoy the rewards. Private Equity was designed for investors who preferred to buy and hold assets rather than sell them for a quick profit.
Market downturns have historically had a short-term impact on secondary markets. The Covid-19 pandemic has brought about an evolution in the financial world and a similar change has been witnessed in the private equity secondary market. Through this article we will understand how the secondaries performance has fuelled post the onset of pandemic.
Historical Returns in the Midst of Pandemic
Market downturns have historically had a short-term impact on secondary markets, reducing transaction volumes, delaying realisations and distributions, and placing downward pressure on price. Secondary markets have usually returned from market downturns with significant activity, and have presented excellent possibilities for investors with available investment money once volatility has subsided and stability has been restored.
During the pandemic, due to great degree of uncertainties and subsequent volatility, investors in the secondary market grabbed the opportunity by buying the dip and securing their positions by purchasing at greater discounts. According to Greenhill’s Report, greater interest has been seen particularly in COVID-proof” sectors, newer vintage funds and more concentrated exposures, which are easier to diligence and underwrite. The secondary market experienced large volume growth in the second half of 2020 and into 2021. In 2021, we can expect secondary transaction volume to hit new highs. Secondaries may find more enticing pricing as a result of the market’s uncertainty, resulting in increased prospects and profitability.
Why the secondaries market are attractive?
· Recent Vintages (post-2015): Recent vintages with unfunded capital have become more attractive to investors in the present circumstances. Investors get insight into the portfolio and platform investments, as well as assurance that the increased cash available may be used offensively as well as defensively. High-quality GPs with ample money who are seen as capable of handling market disruption are especially appealing.
· GP-led Transactions: The number of tail-end funds and older assets appears to have risen with the possibility that the COVID-19 epidemic would further delay exits. High-quality general partners have continued to use the secondary market to maintain high-performing firms while also providing current limited partners with a liquidity alternative. With a number of secondary deals started this summer, the GP-driven market has led the resurgence in secondary transactions.
· Single Asset Transfers: As the frequency of single asset transactions in high-quality firms increases, general partners keep seeking for methods to keep their best companies. Diversifying among funds is one method secondary investors may reduce concentration risk. Single asset transactions are especially desirable in the COVID-19 environment since it is easier to assess the impact of COVID-19 on a single firm than a large mix of portfolio.
· Dry Powder Advantage: These days, investors are demand more liquidity and the ability to rebalance their portfolios across asset classes. Due to this demand, a secondary market has emerged where investors may sell or buy private equity commitments rather than just waiting for a return. The seller of a PE share can access liquidity in the secondary market, just as in the normal stock market, while the buyer receives access to private equity funds and diversification.
It has been estimated that in the year 2020, players in the secondary market have enjoyed high levels of dry powder that is ready for deployment. They are in a position to enjoy profitability by buying in at above average discounts to lock in greater appreciation. With the current trends, it is estimated that the transaction value for secondaries will exceed $100 Bn by the end of 2021. The growth trend is not expected to end anytime soon as markets are now more liquid than ever due to technological innovations in the field and the growing acceptance of digital assets and tokenization.
Since 2006 to 2019, SBOs have witnessed a growth of 5.2% per year. This option has been experiencing rising popularity due to better liquidity options and lower risk staregies. Study conducted by Deloitte estimated that more than half of the investors surveyed expect SBO funds will offer one of the best opportunities for returns over 2020–2021.
The Way Forward
As a result of the current market dislocation, protracted volatility, and ongoing pandemic, the secondary market has seen lower pricing and more opportunities in younger assets. Financial decisions made by investors in the secondary market may be influenced by structural changes caused by economic crises, and failing to account for these fundamental breakdowns in the market may result in investors making incorrect interpretations and portfolio selections. However, secondaries are still, absolutely a great place to put your money. In the second half of 2020 and into 2021, the secondary market saw significant volume growth. Secondary transaction activity is expected to reach new highs in 2021.
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