Five key trends in the rise of secondaries

1 Secondaries strategies are rising in prominence

The secondaries market has been identified as one of the fastest-growing segments in private equity, according to research by affiliate title Secondaries Investor. This growth is being driven by factors including an increasing acceptance of secondaries as a strategic tool for GPs and LPs to manage liquidity and to hold onto prize assets for longer.

Adam Le reports that “dedicated secondaries vehicles focusing on private equity accounted for almost one fifth of the $163.9 billion raised for private equity in the first quarter of this year,” according to data from affiliate title Private Equity International. “By capital, secondaries was more popular than all other strategies bar buyouts,” Le wrote. 

Jake Stuiver, a director within investment bank William Blair’s private capital advisory unit, says the growth in secondaries is the result of more investors understanding the value proposition of the asset class. “There was a point at which secondary funds were thought of by many investors as akin to funds of funds,” he says. “As institutions grew their programs and saw themselves outgrowing the fund of funds model, they didn’t necessarily think of secondaries as a suitable investment because they thought they could go out and make those investments themselves. 

“Secondary funds are now very much front and center in terms of offering a multi-manager strategy that reflects a capability that most LPs don’t have in-house.” 

2 Private investors today have access to an increasingly nuanced liquidity toolkit… 

The most significant development in secondaries of the past two years has been the incredible growth of  GP-led transactions, both in terms of the size of the market as well as in terms of the variety of solutions available. 

According to Evercore managing director Jim Tilson and vice-president Mike Selverian: “The most significant market development, which has resulted in an explosion in deal activity, has been the advent of the single-asset continuation fund.” 

Selverian and Tilson say that “over this period, the single-asset market grew by a factor of 7x and is responsible for approximately 65 percent of the growth in the broader GP-led secondary market.” 

Another solution starting to gain traction is the minority recap. W Capital Partners co-founder and managing partner David Wachter says this is because “minority recaps are straightforward to complete, and unlike continuation vehicles, don’t require a fairness opinion or a lengthy LP tender process.” 

65%

Percentage of the growth in GP-led secondaries transactions over the 2.5 years from H2 2020 to year-end 2022 that can be attributed to single-asset transactions

And there are several other liquidity options gaining ground as well. “NAV loans, securitizations and preferred equity financings have exploded in popularity, and this is one of the fastest growing areas of our market,” says Scott Beckelman, global head of private capital advisory at Jefferies. “In times of volatility, these solutions become particularly popular with LPs that don’t want to realize a loss on a sale.” 

NAV lending, in particular, has seen marked growth in recent years. “This market has more than doubled in the last two years and continues to see tremendous growth and acceptance, similar to the growth in the LP- and GP-led secondaries markets,” says David Philipp, partner at Crestline Investors. 

3 … and as a result, specialization is trending 

With the proliferation of secondaries and liquidity strategies has come the need to be especially discerning about the type of transactions investors utilize to meet their needs. TPG co-managing partner Matt Jones says: “I think investors are starting to realize that there is a benefit to having specialization.” 

He says this is because, “if you look at the evolution of the marketplace, the LP secondaries market and the GP-led market are now fundamentally different.” 

First is the bifurcation between LP portfolio sales and concentrated GP-led deals. “A typical LP deal may involve putting $200 million into an LP transaction that has, let’s say, 20 fund positions and 300 underlying companies. That is a very different investment skill compared to investing $200 million into one company,” Jones says. 

4 Investors with strong primary relationships may have an edge 

For certain firms that have been in the secondaries market since its inception, the key to successful growth has been taking a holistic approach. LGT Capital Partners’ Martha Heitmann, a partner, says that as the market becomes increasingly challenging, the ability to build on relationships in the primary space will be key to accessing the best deals on offer. 

The key advantage of having a strong primary platform, she says, “is that the network to sellers and GPs makes us a value-add partner, with early access to potential deals that are often highly restricted to a few buyers. We often see that GPs prefer to have their existing primary investor base buy interests in their funds, rather than having a pure secondaries player who is only there for this single transaction.” 

She adds that knowing many of the upcoming potential opportunities in the secondaries market means the secondaries team “can really select the most attractive – and recognize the value of sometimes less obvious – assets in a broader portfolio.” 

5 Even in a challenging market, good deals will get done 

At the end of the day, private equity investors are in the game of creating and capturing value, and even in challenging times opportunities for growth abound. 

That said, the scale and pace of growth may be less exciting in certain instances than it was, say, two years ago, and so investors need to make sure they are firmly grounded as they approach any potential transaction. 

“A good GP-led transaction requires a GP who is realistic about where the market is,” says Andrew Gulotta, a partner at Sixpoint Partners. 

“Of course, you always need great companies led by great management teams in sectors that are going to outperform, but having a client willing to be flexible in this tougher environment is important as well.” 

Gulotta says GPs should know that buyers today “are exceedingly looking to see 100 percent rollover with new cash equity commitments on top, particularly if the [continuation vehicle] has a need for unfunded commitments.” They need to know that there is conviction about this asset in order to be swayed.