The secondary limited partnership market should continue to grow, says NYPPEX. The researchers estimate that buyers in the secondary market are sitting on $145 billion in cash and leverage.
“Right now, there’s more capital looking for secondary offerings than there are secondary offerings,” says Allen.
After three years of declines in private equity fund cash flows, the market should also have more sellers, he says. Institutional investors like endowments, foundations, insurance companies and sovereign wealth funds are pressured to sell on the secondary market as they struggle to meet their annual funding obligations.
Among private clients, divorce, death, price volatility and regulation are also driving the sale of private investments on the secondary market.
“Anything that causes an adverse change in financial profile also drives selling activity,” he says. “There are wealthy families in emerging market countries with commodity-based economies dealing with the volatility in oil prices who are faced with sell decisions, for example.”
In the first quarter of 2017, the annualized rate of net cash flow going to limited partners declined from 2.57 percent to 1.96 percent, a 24 percent decline. For reference, limited partners enjoyed a 3.17 percent net cash flow rate in 2015 and a 3.18 percent net cash flow rate in 2014. As private equity income declines, more limited partners will sell their investments to raise cash, according to NYPPEX.
Bid prices on the secondary market peaked in early June, then declined, likely because of buyers’ concerns that tax reform could be delayed by political gridlock in the U.S. Congress. However, since supply and demand could move together for the remainder of the year, prices on the LP secondary market will remain near historical highs.