Discounts to the alternatives secondary market have disappeared, and prices remain higher in the face of upcoming European elections as well as the aftermath of the election of Donald J. Trump and Britain's vote to withdraw from the European Union.
High prices are good news for sellers, but gone are the big discounts secondary market buyers had enjoyed in the years after the financial crisis. Executives of the San Diego City Employees' Retirement System have noticed the change.
Now, “we are happy if we can get 10%; sometimes it's flat,” said Liza Crisafi, chief investment officer of the $7.1 billion pension fund. “Expected returns are much less than they were.”
“It (secondaries) did really well for us. We never had a J-curve,” she added, referring to the low or sometimes negative returns of funds in their early years.
The San Diego fund built its private equity portfolio through secondary markets when it began investing in the asset class in 2009, she said. Back then, the pension fund enjoyed 30% discounts to net asset values while avoiding the J-curve. Secondaries now account for about 22% of the pension fund's private equity exposure, she said.
Still, Ms. Crisafi said the market remains attractive because older funds will return cash faster than new funds.
Current investor interest combined with the amount of capital raised in recent years also has helped drive up prices and transaction volume. The U.K.'s Brexit vote caused secondary market transactions to stall temporarily, but now movement is revving up across asset classes as sellers rush to take advantage of high prices before the coming elections in France, Germany, the Netherlands and elsewhere across Europe as well as the Dec. 6 referendum to amend Italy's constitution.
There are a lot of older funds to buy just now, said Kishore Kansal, managing partner, of London-based secondary markets broker PEFOX. Many pension funds are selling interests in older funds to pare their roster of alternative investment firms and to get cash for their limited partnership interests now rather than wait for the fund to wind down, Mr. Kishore said.
While prices are generally high, there can be wide spreads between the low and high bids, he said. This could be because limited partners differ on the outlook for the funds' underlying assets. However, secondaries fund managers flush with capital commitments are eager to spend it to attract even more capital.
“Some (general partner) buyers, for instance, regard it as an existential issue,” Mr. Kansal said. “Quite simply, if they don't do deals, LPs will be unlikely to give them more money in their next fundraising.”