Fundraising for private capital secondaries slows in first half of 2019

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Despite a lull in the first half of the year for private capital secondaries fundraising, the second half of the year looks promising, according to a new report by Preqin Ltd.

In the first half of 2019, seven funds held a final close securing $2.4 billion from investors. This compares to when funds raised $14 billion in the first half of 2018 and almost $30 billion for the entire year.

“Investor appetite has remained strong for secondaries investment,” said Patrick Adefuye, head of secondaries at Preqin, in a press release. “The advantages are clear: secondaries funds offer attractive returns and most have cashflow projections on much shorter timescales than other private capital strategies. Although fundraising has dipped in the first half of the year, it seems to simply be a lull after the record-breaking fundraising volumes seen in 2017-18.”

In addition to the lower value of fundraising, the size of the average deal has also dropped. In the first half of 2019, the average size of funds closed was $395 million, compared to $876 million in entire 2018. That said, 50 per cent of funds closed have surpassed their fundraising targets this year, compared to 83 per cent in 2018.

While the year saw a slower start, this environment for the second half of the year looks positive, the report noted. There are currently 51 secondaries in the market, seeking $77 billion in capital.

“As funds currently in market hold final closes, we would expect fundraising for the full year to rebound significantly,” Adefuye said. “There are also increasing opportunities for fund managers to put capital to work, although competition is increasing — it will be a key test to see if fund managers can maintain returns in the face of pricing pressure.”

Of note, private and public pension funds were the biggest sellers in the secondary market in the first half of the year, at 13 per cent each.

“Many private sector pension funds have actively sold fund interests in recent years as they become more comfortable operating in the market,” the report said. “Since CalPERS announced back in 2015 that it was looking to sell up to $3 billion worth of real estate fund interests, the public pension fund has continued to offload stakes to reshape its portfolio and sell portfolios worth billions of dollars. Fonds de Pensions Nestlé has also been an active seller in 2019, transferring interests in private equity vehicles to dedicated secondaries fund managers.”

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