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PREQIN SECONDARY MARKET UPDATE Q2 2018
PREQIN SECONDARY MARKET UPDATEQ2 2018
© Preqin Ltd. 2018 / www.preqin.com2
PREQIN SECONDARY MARKET UPDATE, Q2 2018
FOREWORD
All rights reserved. The entire contents of Preqin Secondary Market Update, Q2 2018 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Secondary Market Update, Q2 2018 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Secondary Market Update, Q2 2018. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Secondary Market Update, Q2 2018 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Secondary Market Update, Q2 2018 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.
p3 Fundraising
p4 Funds in Market
p5 Sellers and Transactions
p6 Performance
Aggregate fundraising for secondaries funds in Q2 totalled $7.6bn, bringing total fundraising for H1 2018 to $13bn. Overall, seven secondaries funds closed during Q2, a slight decrease from the eight fund closures in the previous quarter.
Investor demand for secondaries funds outside the typical private equity space has been emphasized by recent fund closures. In Q2 2018, the largest dedicated infrastructure and real estate secondaries vehicles to date reached a final close: Landmark Real Estate Fund VIII surpassed its $2bn target size to reach a final close on £3.3bn and Strategic Partners Real Assets II became the largest ever infrastructure-focused secondaries vehicle with a final size of $1.75bn.
In terms of secondaries funds in market, fund manager confidence to attract LP capital looks as strong as ever. Heading into Q3 2018, there are 39 secondaries funds raising capital, an increase from 34 vehicles at the start of Q2 2018. Furthermore, secondaries funds in market are seeking a combined $52bn, an increase of over $20bn from three months ago. A significant proportion of targeted capital comes from Lexington Capital Partners IX and ASF VIII; they are each seeking $12bn, which would surpass the largest ever secondaries fund closure of $10.8bn in 2016.
Secondaries funds remain a reliable source of returns overall for investors, with median net IRRs for only two vintages from 2000 to 2014 not exceeding those of private capital fund vintages. The relatively safe returns offered by these vehicles are demonstrated by the fact that the lowest bottom-quartile net IRR posted by secondaries funds since vintage 2004 is 5.1% (vintage 2006 funds).
Preqin currently tracks 886 institutional investors that have indicated a preference to sell fund stakes over the next two years, an increase from 754 investors in Q2 2017. Unrealized value still trapped in buyout, venture capital and growth funds that are 10 years or older has increased from $178bn at the close of Q2 2017 to $233bn in Q2 2018, providing greater opportunities for institutional investors and secondary managers to purchase an array of fund stakes.
We hope you find this report useful, and welcome any feedback you may have. For more information about Preqin’s online platform, please visit www.preqin.com or contact [email protected].
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FUNDRAISING
In Q2 2018, seven secondaries funds secured an aggregate $7.6bn,
representing an increase from Q1 2018 when $5.6bn was raised (Fig. 1). Fundraising this year is short of the $26bn record for aggregate capital raised set in H1 2017.
Fundraising has steadily increased for the past consecutive three quarters – however, as Fig. 2 highlights, the average size ($879mn) of secondaries funds closed in 2018 is at its lowest since 2013 ($718mn).
During Q2 2018, Annual Secondary Program Fund IV reached a final close after being highly oversubscribed, closing on €815mn with an initial target of €650mn. Investors have been attracted by the vehicle’s focus on smaller and more complex secondary transactions to offer liquidity solutions and investment opportunities. Montana Capital Partners accesses the secondary market through investing in a variety of complex transactions such as early and stapled secondaries, as well as through investing
in tail-end funds and participating in GP restructuring transactions.
Kline Hill Partners II follows a similar strategy, targeting smaller-sized LP interests and direct secondaries in the buyout and venture capital spaces. The fund also exceeded its initial target of $300mn and closed on its hard cap of $350mn.
2
89
15
810
6
12
36
1
97
8 87
12 12
7
11
8 7
2.02.8
6.6
10.9
2.1
20.9
2.5
12.7
1.1
12.3
0.5
10.4
6.1
12.7
3.96.1
20.6
5.0
14.8
3.85.6
7.6
0
5
10
15
20
25
Q1
Q2 Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
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Q1
Q2
Q3
Q4
Q1
Q2
2013 2014 2015 2016 2017 2018
No. of Funds Closed Aggregate Capital Raised ($bn)
Source: Preqin
Fig. 1: Global Quarterly Secondaries Fundraising, Q1 2013 - Q2 2018
718
1,092
1,278
998
1,164
879
0
200
400
600
800
1,000
1,200
1,400
2013 2014 2015 2016 2017 H1 2018
Source: Preqin
Aver
age
Fund
Siz
e ($
mn)
Date of Final Close
Fig. 2: Average Size of Secondaries Funds Closed, 2013 - H1 2018
Fig. 4: Secondaries Funds Closed in Q2 2018
Fund Firm Fund Size (mn) Final Close Date
Landmark Real Estate Fund VIII Landmark Partners 3,300 USD Apr-18
Strategic Partners Real Assets II Strategic Partners Fund Solutions 1,750 USD Apr-18
Annual Secondary Program Fund IV Montana Capital Partners 800 EUR Apr-18
Auda Secondary Fund IV HQ Capital International 503 USD May-18
Stafford Infrastructure Secondaries Fund II Stafford Capital Partners 400 EUR Jun-18
Kline Hill Partners II Kline Hill Partners 350 USD Apr-18
Schroder Adveq Secondaries III Schroder Adveq 189 EUR May-18
Source: Preqin
Date of Final Close
Fig. 3: Largest Secondary Fund Managers by Total Capital Raised in the Last 10 Years
Firm Headquarters Total Capital Raised in Last 10 Years ($bn)
Ardian France 41
Strategic Partners Fund Solutions US 24
Lexington Partners US 21
Goldman Sachs AIMS Private Equity US 19
Coller Capital UK 13
Source: Preqin
© Preqin Ltd. 2018 / www.preqin.com4
PREQIN SECONDARY MARKET UPDATE, Q2 2018
As shown in Fig. 5, there are 39 secondaries vehicles in market seeking
a combined $52bn in capital heading into Q3 2018. Compared with the start of the year, there are two more funds currently in market, and the aggregate target size is up by more than $31bn. This is due to the launch of two of the largest ever secondaries vehicles in market: Ardian’s ASF VIII and Lexington Partners’ Lexington Capital Partners IX are both seeking to raise $12bn and, if successful, will surpass the previous record of $10.8bn raised for a dedicated secondaries vehicle.
Approximately 62% of secondaries funds seeking capital are targeting North America, a similar figure to Q2 2017. The number of Europe-focused secondaries funds in market has decreased slightly by one fund over the past 12 months, however, the collective capital sought by these funds has increased from $7.0bn in Q2 2017 to $26bn in Q2 2018 (Fig. 6).
The majority of funds currently seeking capital are focused on the private equity asset class (Fig. 7). At this time, there are three dedicated real estate secondaries vehicles in market, seeking an aggregate $3.6bn in capital, the largest of which is Partners Group’s Real Estate Secondary 2017 fund with a target size of $2bn.
Other notable secondaries funds in market have been launched by secondaries specialists, including Coller Capital’s International Partners VIII and Landmark Partners’ Equity Partners XVI, which are seeking $9bn and $4bn in investor capital respectively (Fig. 8).
FUNDS IN MARKET
3228
22
32
44
37 39
26 27
17
28
38
21
52
0
10
20
30
40
50
60
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jul-18
No. of Funds Raising Aggregate Capital Targeted ($bn)
Source: Preqin
Fig. 5: Secondaries Funds in Market over Time, 2013 - 2018 (As at July 2018)
24
10
4
1
24.926.2
0.6 0.10
5
10
15
20
25
30
North America Europe Asia Rest of World
No. of Funds Raising Aggregate Capital Targeted ($bn)
Source: Preqin
Fig. 6: Secondaries Funds in Market by Primary Geographic Focus (As at July 2018)
Fig. 8: Largest Secondaries Funds in Market (As at July 2018)
Fund Firm Headquarters Target Size (bn) Fund Status
ASF VIII Ardian France 12.0 USD Raising
Lexington Capital Partners IX Lexington Partners US 12.0 USD Raising
Coller International Partners VIII Coller Capital UK 9.0 USD Raising
Landmark Equity Partners XVI Landmark Partners US 4.0 USD First Close
Partners Group Real Estate Secondary 2017 Partners Group Switzerland 2.0 USD First Close
Pantheon Global Secondary Fund VI Pantheon UK 2.0 USD First Close
Source: Preqin
Primary Geographic Focus
36
3
48.2
3.6
0
5
10
15
20
25
30
35
40
45
50
Private Equity Secondaries Real Estate Secondaries
No. of Funds Raising Aggregate Capital Targeted ($bn)
Source: Preqin
Fig. 7: Secondaries Funds in Market by Fund Type (As at July 2018)
Fund Type
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60%
43%
30%23% 21% 20% 19%
12%7% 5%
0%
10%
20%
30%
40%
50%
60%
70%
Buyo
ut
Vent
ure
Capi
tal
Real
Est
ate
Dis
tres
sed
Deb
t
Mez
zani
ne
Gro
wth
Fund
of F
unds
Infr
astr
uctu
re
Seco
ndar
ies
Nat
ural
Res
ourc
es
Source: Preqin
Prop
ortio
n of
Sel
lers
Fund Type
Fig. 11: Fund Types Expected to Be Sold by Secondary Market Sellers in the Next 12-24 Months
41% 40%
9% 10%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
North America Europe Asia Rest of World
Source: Preqin
Prop
ortio
n of
Sel
lers
Seller Location
Fig. 10: Expected Secondary Market Sellers in the Next 12-24 Months by Location
As at the start of July 2018, Preqin’s secondary market tracks 886
institutional investors that have indicated that they are likely to sell fund interests via the secondary market in the next 12-24 months. As demonstrated in Fig. 9, the largest proportion (13%) of expected sellers are private equity fund of funds managers, with public and private pension funds each accounting for 12% of all sellers in the space.
The largest proportion of potential sellers active within the market are located in North America, as highlighted in Fig. 10, with 41% based in the region. A further 40% of all sellers are based in Europe and 19% are located in Asia and Rest of World.
Many firms are looking to offload a wide range of fund types via the secondary market. Sixty percent of potential sellers indicated a preference for selling buyout funds (Fig. 11), which is unsurprising given the attractive pricing on offer for these
vehicles. Venture capital vehicles are the second most common fund type expected to be sold by investors, with 43% looking to sell such funds.
Examples of traditional secondary transactions that took place during Q2
are presented in Fig. 12. The quarter also saw Coller Capital’s GP-led transaction alongside Goldman Sachs AIM Private Equity, which purchased underlying assets in Nordic Capital’s 2008 vintage fund, Fund VII.
SELLERS AND TRANSACTIONS
13%
12%
12%
9%9%
8%
6%
6%
5%
20%
Public Pension Fund
Private Equity Fund of Funds Manager
Private Sector Pension Fund
Insurance Company
Family Office
Asset Manager
Endowment Plan
Foundation
Wealth Manager
Bank/Investment Bank
Source: Preqin
Fig. 9: Expected Secondary Market Sellers in the Next 12-24 Months by Firm Type
Fig. 12: Sample Secondary Transactions Completed in Q2 2018
Seller Buyer(s) Fund(s) Sold Transaction Type
Aberdeen Standard Investments Lloyds Banking Group Pension Schemes Apax Europe VI Partial Sale
Alaska Permanent Fund Corporation Ardian Montagu III, Montagu IV, IK VII Fund,
Investindustrial Fund V Fund Portfolio Sale
OP Life Assurance Company Access Capital Partners, Pantheon Sovereign Capital III Partial Sale
Emory University Endowment Strategic Partners Fund Solutions Apax Europe VI Sole Fund Interest
VenCap International Hall Capital Partners Graphite Capital Partners VI Sole Fund InterestLloyds Banking Group Pension Schemes
Norfolk Pension FundStandard Life Investments European Property
Growth FundSole Fund Interest
Source: Preqin
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Among funds of vintage 2004-2014, bottom-quartile net IRR returns have
been positive across all vintages, with the lowest result coming in at 5.1% for vintage 2006 (Fig. 13), illustrating that secondaries are a relatively safe investment.
Secondaries funds typically provide attractive IRRs compared to other asset classes due to funds often being available to purchase at discounts, as well as having shorter holding periods. Except for two vintages, median net IRRs for secondaries vehicles exceed those of private capital funds of vintage 2000-2014 (Fig. 14).
Vintage 2014 secondaries funds have the highest median net IRR (+21.2%) across the vintages examined.
Over the past 10 years, for most vintages, secondaries funds have had higher median net multiples than the average for private capital funds (Fig. 15). This is of significance considering secondaries funds are typically expected to deliver lower net multiples compared to primary investment strategies, as secondary investments are made in stages where the underlying investments have usually already experienced some growth.
The level of unrealized value held in primary funds is an indicator of the potential investment opportunities available to secondaries funds. The unrealized value of 2007 and older vintages (across buyout, venture capital and growth funds) stood at $233bn in September 2017 (Fig. 16). These older vintage funds potentially have a greater need for alternative exit routes, representing an opportunity for the secondary market.
PERFORMANCE
4.2 2.1 7.9
65.175.0
4.0 4.89.1
20.9
26.6
0.1 0.3
1.4
4.0
7.0
0
20
40
60
80
100
120
Pre-2004 2004 2005 2006 2007
Growth
Venture Capital
Buyout
Source: Preqin
Unr
ealiz
ed V
alue
($bn
)
Vintage Year
Fig. 16: Aggregate Unrealized Value of Secondaries Funds by Strategy and Vintage Year (Vintages 2007 and Older, As at September 2017)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Secondaries
All PrivateCapital
Source: Preqin
Med
ian
Net
Mul
tiple
(X)
Vintage Year
Fig. 15: Median Net Multiples by Vintage Year: Secondaries vs. Private Capital Funds
0%
5%
10%
15%
20%
25%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Secondaries
All PrivateCapital
Source: Preqin
Net
IRR
sinc
e In
cept
ion
Vintage Year
Fig. 14: Median Net IRRs by Vintage Year: Secondaries vs. Private Capital Funds
0%
5%
10%
15%
20%
25%
30%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Top Quartile NetIRR Boundary
Median Net IRR
Bottom QuartileNet IRR Boundary
Source: Preqin
Med
ian
Net
IRR
sinc
e In
cept
ion
Vintage Year
Fig. 13: Secondaries Funds – Median Net IRRs and Quartile Boundaries by Vintage Year
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PREQINSECONDARY MARKET UPDATE
Q2 2018
