Coming off the back of a strong 2017, investor confidence in the secondary market has continued into Q1 2018. Such confidence derives from various portfolio management needs being met as well as a strong pricing environment; the robust performance of secondaries vehicles relative to other strategies continues to underpin positive investor sentiment with respect to the asset class.
Europe under the Spotlight
According to Preqin’s secondary fund manager survey conducted in January 2018 for the Preqin Secondary Market Update show that Europe’s secondary market activity is catching up with North America: 79% of respondents have bought interests from investors based in Europe in 2017, only slightly fewer than North America (82%).
As seen in the above chart, the European market is dominated by UK-, Switzerland- and Germany-based buyers, with the remaining individual countries home to an average of 4% of active secondary market buyers. Smaller countries such as Iceland (1.1%) and Portugal (0.7%) have been grouped together in “Other”. The UK, Switzerland and Germany also occupy the same percentages in terms of total assets under management by country for European secondary buyer activity.
When looking at European buyers by sector, pension funds dominate representing a combined 34% (private sector funds account for 21% and public sector funds 13%). Several other investor types are active in the secondary market in Europe, such as asset managers (10%) and banks and family offices 8% each. The remaining investors are predominately represented by investment trusts, sovereign wealth funds and real estate firms. Historically, pension funds have utilized the market to adjust their portfolios, while banks and other financial institutions may need to offload alternative assets on the secondary market at a high discount to keep in line with legislation, therefore gaining experience within the asset class.
The immediate outlook for the secondary market is positive: 60% of respondents to Preqin’s survey expected an increase in secondary involvement in 2018; more specifically, 41% of the same group anticipated transaction activity of $45bn or more. Stimulating factors including pricing and strong public market performance were cited, which could equate to better valuations for privately held assets. Current conditions have created a ‘sellers’ market, so to speak. This increases the number of dedicated secondaries funds, driving larger amounts of capital into the market, which in turn creates a greater demand for secondary offerings and pushes up prices. As well as a desire for increased liquidity from more mature vehicles, 42% expected a certain amount of fund restructuring to occur.