The secondary market in alternative investment funds is sizzling, as institutional investors and managers attempt to clean up their portfolios before the next economic downturn.
Not only are investors selling alternative investment limited partnership interests on the secondary markets but so, too, are fund-of-funds and secondary market fund managers, looking to clean out limited partnership interests in funds that are nearing the end of their very long lives — so-called tail-end funds. These sellers also are selling younger funds of managers with which they don't intend to reinvest and emerging market private equity funds battered by currency volatility.
Sellers are putting their fund interests on the secondary market now while prices are still high and before prices drop in a downturn. Such a drop could force them to hold these aging limited partnership interests for yet another market cycle.
"Many of the new mandates and many of the current deals are (limited partner) portfolio sales," said Gerald Cooper, New York-based partner at Campbell Lutyens & Co. Ltd., a placement agency and secondary market adviser. "It seems like a mad rush to sell assets before the market turns."
Making investors even more eager to sell is that many of these older funds are bringing down the returns of their alternative investment portfolios. The average annual return in years 13 to 15 of the funds' lives was -0.56% as of March 31, compared to 1.12% as of the end of the first quarter of 2017, according to an analysis by secondary market broker NYPPEX.
"In general, tail-end fund returns continue to be very low and, in our view, not worth holding" by pension funds and other asset owners, said Laurence G. Allen, Rye Brook, N.Y.-based managing member and CEO of NYPPEX. But even with the lower returns, the funds can be attractive to managers who think some of the assets could turn a profit.
Fund-of-funds and secondary market managers also are ramping up their sales, amounting to 41% of transactions in 2017, up from 20% in 2016, according to Campbell Lutyens' latest report of estimated 2017 transactions.
"This year, I would expect that percentage to be at the same level or higher," Mr. Cooper said. "We're seeing it across the board from the smallest to some of the largest funds of funds."
Investors additionally are selling interests in older vintage funds of funds, said Kishore Kansal, London-based managing partner of alternative investment secondary market broker PEFOX LLP.
Overall, PEFOX is seeing strong prices on limited partnership interests, he said.
"Some of our funds are pricing at double-digit premiums," Mr. Kansal said.