Co-investments could be next area of growth for rising secondary market

In an already record-breaking secondaries market, the next area of growth could be the sale of bundles of co-investments, according to Gerald Cooper, partner with secondary adviser and placement agency Campbell Lutyens.

“Co-investments have become such a big part of the private equity market,” he said. “If there is some sort of pressure on liquidity in the future, I think you’ll see investors find that they may have to actively manage their portfolio to right-size risk, and selling co-investments will probably pick up.”

Co-investments have been part of secondary sales, usually when a limited partner is selling down exposure to a GP they no longer want to support. But as LP co-investing has proliferated, the idea of portfolios of co-investments is a new one and would add yet another component to a frenetic market.

The market last year reached about $73 billion in transaction volume, Campbell Lutyens said in its just-published 2019 Secondary Market Overview, up 45 percent from 2017.

Volume last year was boosted in the second half by at least eight transactions exceeding $1 billion, the report says. Along with more co-investments, another area of growth in the secondary market is the rise of megadeals, Cooper said.

Two deals in the market this year could reach valuations of $5 billion each — Japan’s Norinchukin Bank is selling a portfolio of private-market exposure valued between $4 billion and $5 billion, Buyouts reported. And Energy & Minerals Group, an oil and gas investor, is running a fund restructuring process that could be valued at up to $5 billion, Buyouts reported.

If completed at this level, these would be the largest-ever secondary deals. Several sources say that rather than an anomaly, deals of this size will be more likely going forward.

Secondary firms are raising ever-larger funds, and with the use of leverage and co-investors, LP portfolio sales of this size are in reach for single firms, Cooper said.

“I don’t know if we’ll see a lot more of these deals. … I just don’t know if you have people looking for liquidity at that scale. But where these situations emerge, there is demand to absorb them,” Cooper said.

“If anything, [deals of this size mean] mean funds will continue to get larger,” he said. “If I’m a secondary fund and I can demonstrate that I can do $4 billion to $5 billion transactions, then I can justify the fund-size increase next time around.”

As has been the case for the past few years, GP-led secondary transactions have been taking a larger slice of the market. GP-led deals like fund restructurings accounted for about one-third of total secondary volume, growing by about 66 percent over the past three years, Campbell Lutyens said.

One type of GP-led deal becoming increasingly popular is single or concentrated asset deals. Such deals usually include one or several assets moved out of an older fund into a new pool that gives the GP more time to manage them. LPs in the older fund can choose to sell out of their interest in the asset or assets, or shift their interests into the continuation pool.

Some large single-asset processes in the recent past include Lion Capital’s single-asset process for frozen-food retailer Picard; Hellman & Friedman’s process for Kronos, a cloud-based human-resources-software provider; and Lime Rock Partners’ deal for Crownrock.

Action Item: Reach Gerald Cooper at cooper@campbell-lutyens.com