Investors who want assets that offer both higher returns and liquidity may find the answer in the secondaries market.
The report shows that over one third of North American limited partners (LPs) and a quarter of European LPs are planning to sell their assets into the secondary markets in the next two years, but it is the secondaries market in Asia-Pacific that has gained most interest, where 42% of LPs are planning to sell private equity assets.
Two key factors are driving the secondaries market, says Gerald Carton, investment principal, Coller Capital.
The first is that where there has been a rebound in returns and an increase in asset values, funds will have the opportunity for a trade sale on the secondaries market.
“The pull factor is that prices are now much better than they were 24 to 48 months ago, incentivising the investors and galvanizing the secondaries market,” says Carton.
The second is that, as the Coller survey reveals, some GPs are having difficulty raising a new fund.
Over the period of the global financial crisis, many private equity investors have refused to reinvest with their GP and instead opted to reshape their portfolios to include higher performing sectors, such as the emerging markets.
Carton says: “Poor performance is now a key measure, and investors have taken fright.”
Some sales are due to the new, post-crisis regulatory environment.
Solvency II and Basel III capital requirements are forcing many banking and insurance groups to reconsider their involvement in non-core areas of business, including private equity and fund management.
The secondaries market is also the source of assets of different vintages. A portfolio can be constructed to give maximum diversification of vintage, geography and sector.
“The secondaries market allows the fund manager to back-fill the portfolio with older vintages, and so build a fully diversified portfolio, as with a bond or equities portfolio,” says Carton.
The report shows that about one third of North American (30%) and European LPs (35%) have expressed an intention to buy into the secondaries market.
But, again, it is the Asia-Pacific LPs who are most enthusiastic, with 68% intending to buy private equity interests in the next two years.
Jeremy Coller, chief investment officer of Coller Capital, said: “Investor plans for secondaries sales show the scale of the change coming to the private equity landscape.
He concluded: “When you also look at the proportion of investors looking to buy secondaries, the flood of money targeting new private equity markets and the accelerating pace of recruitment within LP institutions, it’s clear we are working in a rapidly evolving industry.”