Prices for alternative investment fund limited partnership interests are expected to drop in the second half of this year — with secondary median bids declining about 3.5% to an average of 80.18% of net asset value — driven down by fewer exits and less distribution of capital back to investors, secondary market brokerage firm NYPPEX predicts.
Institutional investors' negative view of the public stock, bond and commodities market will also impact secondary market pricing in the second half of 2015.
“Some secondary buyers have started to consider recent higher levels of volatility into their pricing models, typically with a focus on a fund's region and strategy,” said Laurence G. Allen, managing member and CEO of NYPPEX.
Transaction volume in the secondary market for private market limited partnership interests increased 2.5% year-over-year to $18.7 billion as of June 30, according to estimates in NYPPEX's soon-to-be released midyear worldwide secondary market report.
The secondary median bid for all alternative investment fund strategies worldwide declined about 0.91% to 83.09% of net asset value as compared to 83.85% as of Dec. 31, 2014.
For the first time, the highest demand was for real estate limited partnership interests, which pushed the high bid for real estate funds to 106.39% of the fund's net asset value, followed by buyout at 104.97% and venture capital at 101.15%.
This was driven by investors increasing allocations in income-producing investment strategies with low correlations to the equity markets such as real estate, Mr. Allen said.
Value-added real estate fund limited partnership interests had the most demand in the first half of this year. Opportunistic real estate fund interests had the next most demand, followed by core real estate fund interests.
“We believe secondary buyers of real estate funds in the (first half of the year), in general, sought superior returns, but with moderate risk. That results in selecting value-added fund strategies (moderate risk, moderate return) as opposed to core (low risk, low return) or opportunistic (max risk, max return),” Mr. Allen said.
Real estate limited partnerships will continue to demand higher prices in the second half of 2015 “driven now by concerns about higher stock market volatility,” he said.
In the second half of this year, large endowments, foundations and public pension funds with more established private equity programs are expected to continue reducing exposure to private equity due to concerns about the ability of general partners to prudently deploy significant amounts of “dry powder” in an environment with high valuations, the report noted. However, smaller endowments and foundations are expected to increase target allocations to private equity in search of returns, the report said.