How long will the secondaries market thrive? Unquote published its answer, stating that the secondary PE market thrives on “every macroeconomic hit that slows the primary market down”.
To the degree the European primary market has been slowing down lately, the secondary market has picked up the slack, and then some, say unquote. It recorded eight secondary buyouts in June alone, most notably EQT’s EUR 1.82 billion acquisition of BSN Medical from Montagu Private Equity Partners.
The secondary market feeds off the debt crisis, explains unquote, the poor lending outlook of banks and macroeconomic stress factors. The increase in available portfolios is further bolstered by large-scale sell-offs by insurers and banks in anticipation of Solvency II and Basel III.
But ultimately the profitability of secondary transactions is subject to the same factors that drive the primary market. The risks, according to the article, include valuation. The deepening European crisis and its complex effects makes forward valuations extremely difficult to estimate and the capital structure of many companies may be unsustainable.
The risk of misleading and inflated valuations is compounded by the incipient decrease in the number of distressed sellers and a continuing growth in demand for mature portfolios that offer attractive returns.