Sealey - Private Equity Secondaries Market : a Complete Guide to its Structure, Operation and Performance.

By Andrew Sealey, Campbell Lutyens

The financial landscape has changed significantly in the five years since 2008 and the private capital markets have also been materially impacted. In 2008, when the first edition of The Private Equity Secondaries Market was published, it was difficult to predict the impact the impending credit crisis and subsequent global financial crisis would have on both the primary and secondary markets. While the primary fundraising markets have suffered over the last five years, the secondary market for private equity and related asset classes (including infrastructure and real estate) has continued to grow and mature. The secondary market, particularly in private equity, is now firmly established as a substantial and sophisticated part of the market, which is integral to the wider industry.

Since 2007, private equity secondary market volumes have grown by approximately 95 percent reaching a record level of approximately $26 billion in 2012. This period of growth has seen fairly consistent annual increases; the exception was 2009 when rapidly falling asset values and market uncertainty led to a considerable valuation gap between buyers and sellers and a corresponding material drop in completed transactions. Despite this, the period 2008 to 2012 saw an estimated $92 billion of secondary transactions completed versus $46 billion in the previous five years (2003 to 2007), representing an increase of almost 100 percent.

This market growth has occurred against a backdrop of what is widely considered to have been the worst global economic crisis since the 1930s and has, in part, been fuelled by sellers impacted by the financial crisis together with new regulatory developments. However, the underlying historic growth of the private equity asset base has arguably been a more important contributor to growth. The growth in market volume (with the notable exception of 2009) has remained at a fairly consistent percentage of the global assets committed to the asset class.

The increase in demand for early liquidity from investors has been matched by increasing demand from both traditional secondary buyers as well as new, historically more primary-focused investors. Specialist secondary funds raised over $100 billion between 2008 and 2012; a time when institutions have generally been very cautious about commitments to the private equity market and when overall fundraising has dropped by around 50 percent from the peak years of 2007 and 2008.

A material proportion of secondary sales have been from banks, driven by the regulatory pressure of Basel II and III, the need to improve Tier I capital requirements, the desire to improve balance sheet utilisation, in some cases pressure to shrink balance sheets and in others to exit non-core activities. In 2011 and 2012, bank sales represented almost 35 percent of the secondary market by volume. Further legislation, including ringfencing and the finalisation of the Dodd Frank/Volcker legislation, could contribute to further sales of private equity assets from US banks and probably from most other larger banks around the world.