2017 was a record-setting year for secondaries fundraising, with 30 funds reaching a final close collectively securing $37bn (as at January 2018), the highest amount recorded. The average size of secondaries funds closed also rose to an all-time high of $1.4bn, up from $1.1bn in 2016.
Secondaries funds offer benefits unavailable in primary vehicles – such as acquiring positions later in a fund’s lifecycle, possibly at a discount, and the opportunity to mitigate the J-curve effect – which has helped drive investor interest. Secondaries funds also put less investor capital at risk owing to faster capital distributions than primary funds. These factors contribute to the attractive returns generated by secondaries funds, which in turn have translated into sustained investor appetite for such vehicles.
The growth of secondaries fundraising in 2017 is largely accounted for by the five largest secondaries funds closed; collectively securing $26bn in investor capital, they represent 71% of overall secondaries fundraising for that year. The largest secondaries fund closed in 2017 was Strategic Partners VII in January, which secured $7.5bn, 136% of its initial target. The fund is managed by Strategic Partners Fund Solutions (the secondary fund of funds management arm of Blackstone Group), and primarily looks to acquire tail-end interests in mature private equity funds managed by US- and West Europe-based managers.
There are fewer secondaries funds in market than one year ago; nevertheless, secondaries managers believe investor appetite will persist, with 34 secondaries funds in market targeting an aggregate $18bn (as at January 2018). While only half the amount of capital is targeted by six fewer funds compared to the start of 2017, there are still some large secondaries funds in market, with six of these vehicles each targeting at least $1bn. Among these funds is Landmark Equity Partners XVI, which is targeting $4.0bn with a $4.7bn hard cap, primarily seeks to acquire buyout fund stakes globally, focusing on North America and Europe. The secondaries vehicle held a first close in April 2017, securing $224mn.
Many specialist secondaries funds now have a core pool of investors that have become familiar with such vehicles, providing greater diversification within an LP’s portfolio. With new investors continuing to enter the asset class, and recognizing the benefits secondaries funds can offer, it is likely that the market will see further growth and attract high levels of investor capital in the coming years.