Setter Capital: Latest Reports Looking into the Current Secondary Market


August 18, 2015


Setter Capital, the independent advisory firm, published its findings on the most sought-after European large LBO managers in the second quarter. The list was topped by CVC Europe for the second year running. Furthermore, the Setter Capital report on global secondary activity during the first half of the year found private equity secondaries performing strongly, while total transactions in the market dropped.


The Top European Large Buyout Funds


The Setter Capital rankings of European large buyout funds did have plenty of movement, even though CVC managed to hold on to its top spot. The second spot went to Apax Europe, which managed to climb up from its previous ranking of four. The top five also saw an entry by BC Partners at fourth place. The buyout fund stood at sixth in the rankings last time. Cinven, which took the fifth place, also managed to improve its previous rank.


On the other hand, EQT (Flagship LBO Funds) dropped from the second place to third. The biggest decline in ranking saw Permira’s fund drop from fifth place to tenth. There was also a newcomer in the top 20, as Terra Firma Capital Partners managed to snatch the 20th place in the rankings.


Fund Performance
The report looked at funds operating in Europe and which invest from funds of over $2 billion. The findings are based on the collective shortlists of over 1,300 buyers covered by the firm.


According to the findings, the average price of the fund stakes for these most-sought companies stood at 97.7% of net asset value. Buyer demand for the top funds remain strong, with average number of Prime Buyers being 58. For funds who remain unranked, the average number of Prime Buyers is just 3.


Much of this is down to better fund performance. The top LBO managers have an average IRR of 16.7%, while Unrated managers have an IRR rating of 11.2%. Better fund performance is partly down to the fact that ranked funds have been around longer than Unrated funds. While the most sought-after funds have been fundraising on average for seven funds, the Unrated managers typically have raised funds for just two funds on average.


The findings continue to highlight the strong performance by European funds. The Wall Street Journal pointed out how the recent decrease in Euro-US dollar exchange rate has helped secondary pricing of these funds. Top euro-denominated funds, although priced a few percent higher than US dollar-denominated funds, continue to perform strongly.


Global Capital Volume


In terms of the global secondary activity, Setter Capital’s Volume Report H1 2015 made some interesting findings. The secondary market took a dive in terms of total volume of completed transactions, as the first half of 2015 saw deal volume at $20.6 billion. This was down by 5.1% from the $22 billion recorded during the first half of 2014.


Even though the value of total secondary market declined slightly, private equity secondaries continued to perform well. The private equity secondaries saw growth of 1.9% year over year, with total transaction volume standing at $16.2 billion. Infrastructure secondaries were the other big performer, with the transaction value growing an impressive $28.5% to $614 million.


On the other hand, real estate, hedge fund and energy secondaries declined during the first half of 2015. Interestingly, the first half was marked by the strength of a few large buyers in the market. Eight of the largest buyers, which are funds spending over $600 million during the first half, accounted for nearly 50% of the total volume. In the first half of 2014, the proportion stood at 44%. There were also plenty of newcomers, as 23% of the buyers investing in other alternatives for the first time.


Another big finding of the report was the increase in direct investments. During the first half of the year, secondaries of direct investment went up from the $4.6 billion in H1 2014 to $5.5 billion. This is a 19.3% increase highlighting how fund restructuring and increased focus on co-investments are changing the market.


Breakdown of the Purchased Private Equity Funds


According to Setter Capital’s report, private equity fund purchases accounted for 77.1% of total fund sales. These purchases totalled $11.6 billion. Real estate funds were the second most bought secondary with purchases totalling $2.3 billion.


LBOs continue to control the private equity market. Leveraged buyouts accounted for 82% of the total private equity funds purchased. The transaction volume of LBOs stood at $9.5 billion year on year, which was up by 12.8% from the volume in the first half of 2014.


Debt purchases increased their transaction volume the most, as volume grew from $385.2 million in H1 2014 to $662.3 million in the first half of the year. Considering the upheaval in commodity prices, energy funds saw the biggest drop in private equity funds. The total energy transaction deal was down by 78.5% year on year. The transaction volume dropped from $1.6 billion in H1 2014 to $349.7 million in H1 2015.


Tougher Competition


Overall, both reports highlight the increasing competition in the secondary market. Setter Capital’s report looking into the first half performance asked respondents about the outlook in the industry, with some interesting findings.


33.3% of the respondents said they feel the competition in the first half of 2015 was more intense to competition during the same period last year. Only 2.8% of the respondents felt the competition levels have decreased, with the rest feeling the situation remains unchanged.


Setter Capital’s report last year also found nearly 50% of the respondents predicting a better full year to 2013, while only 19% of the respondents felt this year to be better than 2014. Overall, the majority feels the global transaction volume would stay similar to levels last year. The prediction saw the total volume for all assets to fall at $45.7 billion, which would be a 7.4% drop from last year. Private equity deal volume is thought to stand at $36.6 billion at the end of the year.


It remains to be seen whether the more cautious approach by fund managers is appropriate. If you want to find more deals to increase your private equity deal flow for 2015, check out the DealMarket platform.

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