Diverging fortunes predicted for hedge and private equity secondary markets

Secondary trading markets for hedge and private equity funds will be transformed in the first half of next year – but in very different ways to one another, say alternative asset trade brokers Cattegatt Capital.

For hedge funds, Cattegatt estimates about $200m of stakes will enter markets by June, but the market overall will continue to shrink. Volume already declined from about $60bn since mid-2011, according to some estimates, to $20bn now, according to Cattegatt.

Lars Lindqvist (pictured), founder and CEO, says: “Liquidation of hedge funds have been active in 2010- 2011, so the volume has shrunk, and will continue to shrink.

“I doubt the hedge fund secondary market will be sustainable in its current form because it is self-liquidating – each time assets are successfully placed and a sale made, a piece of the hedge fund secondaries market disappears.

“As a large portion of sellers have been selling very actively, not least during 2011, supply has been effectively reduced.”

For private equity, by contrast, Cattegatt estimates European banks will have to offload a total $2.5trn of ‘non-core’ assets by June to meet regulatory requirements. German and UK banks will need to divest $500bn – all fuelling the private equity secondary markets significantly, according to Lindqvist.

He says in the first half of 2012 Cattegatt has about $100m of firm, exclusive private equity deal flow to place, “but we expect significant volume to crystallise”.

In the short-term hedge fund secondaries volume will also grow, and Cattegatt has three portfolios private banks have asked it to find buyers for during next quarter.

Cattegatt already saw tender offers for special credits, PE-type holdings in agriculture and shipping funds, and tender offers for full loan portfolios. “Such tender offers may be attractive solutions for many hedge fund managers, since it offers a full liquidation to one single counterparty, rather than sell-off over a longer time”.

Lindquist says inflow to hedge fund stake trading markets over the coming six months will include about $7bn in event-driven fund stakes, $3bn in asset-backed lending and private investment in public equities (Pipe) strategies and $10bn in assorted other strategies.

Cattegatt focuses on interests in illiquid assets in private equity, hedge funds, and other assets including collateralised loan and debt obligations.

Lindqvist notes his firm brokered about $30m in ABL funds this quarter, “unseen in the first quarter, because investors are looking at more esoteric funds where prices still are low.” Cattegatt also helped transact African mining interests, and life settlements.

 

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