Elm Capital: Secondary Markets Review – May 2023

May, 2023

Elm Capital: Secondary Markets Review – May 2023

With COVID-19 easing, 2022 displayed the first signs of normality with the resurgence of in-person meetings and reduced out-of-office work schedules. Despite this, 2022 was not without its own issues, namely;

- the conflict in Ukraine;
- early signs of macro headwinds caused by government spending;
- the global energy crisis;
- the drying up of excess capital following the lockdown; and
- the rise in interest rates.
In consequence of the political and economic uncertainty during 2022, Elm Capital observed an increase in caution taken by market participants as investors attempted to navigate through adverse conditions. Investors subsequently reduced their commitments to both primary funds, associated with high blind pool risk, and secondary market opportunities, which maintain sticky valuations due to infrequent reporting in comparison to public markets.
The sharp fall in the stock markets between Q1-Q2 of 2022 and the relatively insignificant adjustment in private equity valuations have caused many investors to become overallocated to the latter asset class (the so called “denominator effect”). In addition, in an environment of higher interest rates, fixed income markets have become a more attractive asset class than when interest rates were close to zero or below.
As a result of the decline in public market valuations, secondary buyers priced in an anticipated correction of private equity valuations at year end, causing a widening of the bid-ask spread. Whereas in H1-2022 the median of the highest prices across all funds observed by Elm Capital was 88% of net asset value (“NAV”), in H2-2022, it decreased to 70%. Prices during H1-2022 were naturally very different before and after the start of the war in Ukraine. The median price for buyout transactions was in the single digit discount area before the Russian invasion.

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