Private secondaries are on an explosive growth trajectory. Some of this can be attributed to the rise of private capital markets as a whole. But certainly the unique market conditions of the past two-plus years have played a significant part as well.
Today, with the market still undulating under lingering pandemic-related stresses – supply-chain disruption, worker shortages, etc – new challenges abound. As we gathered interviews and data for this report, these are the six things that stood out.
1. Record-breaking volume
The secondaries market grew 67-fold to $134 billion from 2000 to 2021, according to data from UBS Asset Management and Evercore. As Evercore private capital advisory managing director David Markson tells us: “With total transaction volume topping $66 billion, 2021 was another record year for the LP secondaries market.”
Total secondaries market volume in 2021, according to UBS Asset Management and Evercore
Meanwhile, Neuberger Berman’s Tristam Perkins, global co-head of secondaries private equity, says “the GP-led market has more than quadrupled in volume over the last five years, accounting for more than half of all secondaries market transactions last year.”
As to what might be driving all this growth, Ares Management partner Barry Miller says that “as the private equity industry has continued to grow, managers have moved from raising a fund every five years, to every four, and then every three. Now we are seeing managers raise money pretty much every year.”
Looking ahead, there seems to be a general consensus among investors that the market is poised for even more dramatic growth in the coming decade.
“Over the past 20 years, the secondaries market has experienced significant growth,” says Whitehorse Liquidity Partners managing partner Yann Robard. “And yet, at Whitehorse Liquidity Partners, we believe a range of forces are poised to significantly accelerate the scale and impact of the secondaries market even further over the next decade. We predict that the secondaries market can grow to more than $1 trillion by 2030.”
2. Supply is outpacing demand
Perkins says that “secondaries markets are currently saturated with a supply of potential GP-led transactions and short on capital and experienced secondaries investors who have previously led and executed similar complex deals.” He adds that there is “a lot of demand from GPs, but GP-led activity is currently constrained by the amount of capital that a reasonably small number of secondaries groups have available to lead and underwrite transactions, creating interesting dynamics for buyers and secondaries investors with strong GP-led capabilities.”
This is creating the conditions for what Ares’ Miller is calling “a buyer’s market.” But, of course, it is also providing new opportunities for LPs to access liquidity.
3. The market is bursting at the seams, but still growing
LGT Capital Partners’ Andrew DiGeronima says “deal size continues to increase with transactions greater than $1 billion accounting for roughly half of GP-led dealflow in 2021. This dynamic is creating structural challenges, as most secondaries buyers are constrained by single asset exposure.”
“The segment is outgrowing the capital available for GP-leds, so investors realize this is a very attractive segment in the market where they can generate alpha,” says Shawn Schestag, a partner in Sixpoint Capital Partners’ secondary advisory business. “There has been a greater supply of these transactions than available dry powder to pursue them.”
Despite these challenges, all signs indicate “the secondaries market will continue on its growth trajectory and play an increasingly important role despite the threat of a market correction,” says Scott Beckelman, Jefferies’ global co-head of private capital advisory.
4. Specialization is one way to mine value
Manulife Investment Management’s global co-heads of secondaries Jeff Hammer and Paul Sanabria say that “the rise of GP-led secondaries has changed the landscape for private equity allocators by providing more options to access the asset class.”
“Through GP-led secondaries, it’s now possible to invest in potentially lower-risk, higher-returning and shorter duration investment opportunities by consistently accessing high-performing companies with proven sponsors and shorter expected holding periods,” they say.
In GP-led transactions, Neuberger Berman principal Viktor Ko says, “deals are usually more concentrated around a small number of companies, which means the secondaries investor needs to be able to do deep-dive diligence into those assets. That requires a lot of sector expertise and capital market knowledge, and the ability of an investor to tap into the resources of a broader platform, with dedicated sector specialists across private and public markets, is a key differentiator in unlocking the value in these complex transactions.”
TPG principal Pamela Hanafi agrees. “Investing in a single asset is different from evaluating a diversified LP portfolio,” she says. “Specialists are better equipped to establish valuation and therefore are viewed as credible price-setters by sponsors and limited partners.”
5. A holistic approach is another
Fort Washington Capital Partners managing director Steve Baker tells us that the market isn’t as binary as just LP deals and GP-leds.
“There are GP-led deals. There are traditional LP-led deals. But there are also tender offers and strip sales, for example, that fall in between. We believe that a secondaries investor needs to view the market holistically,” Baker says. “Sometimes a deal may even start out as a traditional secondaries transaction but end up as a GP-led transaction. It is important not to confine yourself to one camp or the other.”
6. Either way, risks abound
The geopolitical risks and lingering issues related to the covid-19 pandemic are in certain ways propelling a flight to safety. “There’s a higher risk premium in the world in which we’re operating today,” says Sixpoint Partners’ Schestag.
But that doesn’t mean investors should lose heart. “Secondaries investors are coping with macroeconomic drivers – whether it’s interest rates or geopolitical risk – with a general migration toward defensive industries such as healthcare, or essential industries such as companies that support infrastructure and the utilities sector,” Schestag says. Even in a challenging market, opportunities to find and create value are out there if you know where to look.