Secondaries fundraising saw a sharp slowdown in Q2, with just five funds raising a combined $4 billion, research firm Preqin reported. Still, the pullback follows a record Q1, during which nine funds raised $19 billion, and the year is still on track to set a record for fundraising. The blockbuster activity in Q1 likely ate into the demand during Q2.
“The opening quarter of 2017 saw a record level of fundraising activity for the private capital secondaries market. Following that, it is to be expected that the industry would pause in Q2, as many investors will have made commitments to funds closed recently,” said Patrick Adefuye, head of Secondaries Products at Preqin. “In that context, low quarterly fundraising figures should not be taken as a negative sign for the overall growth and health of the secondary market.”
The combined total for the first half of 2017 now puts the year on track to match four-fifths of the total raised in 2014—the prior record year—and on pace to set a new record. The quarter also saw increased signs of stratification and diversification in the market, Preqin said. Q2 saw the closure of the largest-ever preferred equity financing vehicle, while funds currently in market include a potentially record-breaking vehicle focusing on infrastructure stakes.
The strong performance of recent secondaries funds is fueling the investor interest. Secondaries funds have posted higher median net Internal Rates of Return (IRRs) compared to the wider private capital industry in every vintage year from 2007. 2014-vintage secondaries funds have a median net IRR of 19.7%, more than twice the median 9.6% performance for 2014-vintage private capital funds as a whole, Preqin noted.
The largest fund closed in the quarter was the $1.9 billion Hamilton Lane Secondary Fund IV.
Forty-five secondaries funds remain in market. These vehicles are seeking $32 billion. down from $38 billion that was sought by 44 funds at the start of the year.
Dry powder for secondaries vehicles has reached $87 billion as of the end of June 2017.