The private equity secondary market this year could see 25, $1 billion-plus GP-led deals, sources told Buyouts.
This would comport with the increase of GP-led secondary transactions, which include fund restructurings, tender offers and other “direct” secondaries. A few years ago that kind of volume around fund restructurings and tender offers was almost unthinkable.
But the numbers tell the tale: In the first half, GP-led deals represented 42 percent of around $42 billion of total volume, up from 29 percent of the market in the first half of 2018, according to Evercore’s first-half secondary deal volume report. Total volume in the first half is up from $32 billion for the same time last year.
Greenhill Cogent, which also just released its first-half volume report, found that GP-led deals represented about 33 percent of total volume, or about $14 billion out of $42 billion of total volume.
This is a major change in the market, and one that is helping to drive total deal volume to record levels. The $42 billion of total deal volume actually exceeds full-year volume from three years ago, Greenhill Cogent reported. At that pace, total secondary volume could reach $90 billion or more, according to Nigel Dawn, global head of private capital advisory at Evercore, and the Greenhill Cogent report.
“The increase [in GP-led secondaries] is actually pretty remarkable,” Dawn said. In 2013, GP-led deals represented about 20 percent of total volume, which, in dollar value, was about $5 billion, Dawn said. “These sorts of deals have moved from being often challenged GPs to being the bluest of the blue chip firms.”
Established managers that have used the secondary market to sort out older funds include TPG, Thomas H. Lee Partners, Warburg Pincus, Accel-KKR, Oaktree Capital Group, NEA, Ares Management and Bain Capital Credit.
Limited partners have become used to analyzing GP-led offerings, which is also helping bolster this type of activity in the market. “[LPs] can spot quickly things they don’t want, things they don’t agree with,” Dawn said.
Some LPs still express reservations about GP-led deals, especially those that come with a slug of fresh capital into a new fund, known as a staple. There is a concern about conflicts in these situations when the potential for a primary commitment into a new fund is involved, sources have told Buyouts in past interviews. But the ability for GPs to close these deals shows that despite reservations, LPs are pushing the transactions forward.
Of course, helping to drive deals is the amount of capital secondary firms have been able to raise. There was about $91 billion of uncalled capital in the first half and $44 billion of near-term fundraising potential, Cogent said. Evercore sees around $67 billion of capital to be raised for secondary deals in the next 12 months.
Pricing, however, seems to have stabilized, Cogent found. Average high bid for all strategies was 89 percent of net asset value in the first half, down 300 basis points from last year, Cogent said. Average high bid for buyout dropped by 200 basis points to 95 percent of NAV from 97 percent last year, though certain GPs still command a premium, Cogent said.
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