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Editor’s Letter: Secondaries hit another milestone in 2018

Every year the secondary market seems to hit another milestone. Last year will be known as the one in which the “7” number was broken.

Estimated secondary market deal volume in 2018 vaulted $70 billion, according to two surveys published Jan. 24 by Evercore and Setter Capital.

That would be the highest level ever in the perpetually growing secondary market, which provides a liquidity outlet to the naturally illiquid private equity market.

Evercore estimated activity at $72 billion, up a third from $54 billion in 2017. Setter Capital showed total volume at $79.7 billion, up 1.2 percent from 2017.

Traditional LP portfolio sales drove deal activity, but GP-led deals continue to take more market share. “GPs seem to be increasingly utilizing the secondary market as an alternate route to M&A or an IPO,” Evercore said.

Evercore’s volume survey digs into the details on how deals work.

For example, GP-led deals often hinge on whether existing investors in older funds actually choose to sell their interests in the pools. If not enough existing LPs sell, buyers may walk away from the deals.

Within GP-led deals, 81 percent sold their fund stakes, while 19 percent chose to roll their interests with the managers as part of restructurings, Evercore found.

For tender offers, in which LPs can simply choose to sell or not, 61 percent chose to hold their interests and 39 percent decided to sell. That 39 percent is up from 22 percent in 2017.

While the number of sellers was up, that number fluctuates depending on the individual deals. The biggest challenge in tender offers is getting a significant number of existing LPs to actually sell.

That decision is driven by various factors, including price but also whether the sale is actually worth it for existing LPs. Once investors sell, they must do something with the proceeds.

Another big theme last year was the rise of single-asset or concentrated-asset deals. These focus on one asset or a small portfolio of assets, rather than a larger fund transaction.

The risk in these deals is that they hinge on the fate of one or several companies. That is not a risk secondary buyers have traditionally been willing to assume, but in this era of megasecondary funds, buyers are more willing to take the concentration risk.

Single-asset secondary deals represented about 10 percent of GP-led transactions in 2018, according to Evercore’s survey.