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Secondaries market cratered last year but should come roaring back in 2021

Buyers told Setter Capital they expect global secondaries investing to reach an all-time high of nearly $90 billion this year.

Covid-19 delivered a gut punch to secondaries dealmaking in 2020, but buyers are expecting a quick return to record-level market volumes in the months ahead.

Global secondaries investing totaled almost $62 billion last year, down 28 percent from 2019, according to a Setter Capital report issued this week. The sharp drop put an end to what had been a steady annual climb in deployments, peaking at 2019’s $85 billion-plus.

A weaker secondaries market was also seen in the number of deals. Some 1,376 transactions were completed in 2020, 14 percent below the number a year earlier. Deal sizes, averaging about $44.9 million last year, fell 16 percent.

The decline was reflected across most asset types. Investing in private equity assets (funds and directs), which continued to drive dollar flows in 2020, came in at $56 billion, down 28 percent year over year.

The culprit, of course, was the health crisis. Sixty percent of buyers surveyed by Setter said they felt more deals fell apart last year than in 2019. The most commonly cited reason for broken transactions was sellers simply electing not to proceed.

Another was so-called “adverse economic issues,” which involved considerable use of Material Adverse Change clauses.

Late-year surge

Despite the overall picture of cratered secondaries dealmaking, the report by Setter points to signs of revival in last year’s final months. This was evident in direct secondaries, which plummeted in H1 2020, but finished the year with $32 billion invested, up 11 percent from 2019.

A major factor in the turnaround was general partners looking to extend investment runways, raise money for portfolios or create liquidity for limited partners. Most buyers perceived a greater number of GP-led transactions in 2020, relative to the preceding year, many of them happening in the second half.

This accords with Buyouts’ September cover story, Investors in secondaries prepare for a year-end deal frenzy. Among other things, the story anticipated robust GP-focused volumes in the post-Labor Day period.

Given these results, it is perhaps not surprising that Setter also found fund managers were 2020’s leading sellers. Pension funds were the second-most-active sellers. Buyers are forecasting a flip in the year ahead, with pensions leading the market’s sell-side.

Because of the late-year surge in deployments, the uncertainty and volatility of 2020 could be all but forgotten in 2021. Buyers told Setter they expect global secondaries investing to this year reach an all-time high of nearly $90 billion.

Fresh funds for deals

Another sign of renewal is seen in the fundraising market. Global secondaries fundraising last year was close to triple that of 2019, according to preliminary data from Secondaries Investor. Offerings collected a record total of almost $96 billion in 2020, compared with the prior $33 billion.

A key to the big dollar hauls were giant funds. Lexington Partners’ ninth flagship vehicle was one of two global secondaries pools to amass $14 billion. Goldman Sachs’ Fund VIII also brought in $10 billion.

Not surprisingly, 2020’s top fundraisers were among its predominant buyers, Setter reports. Capital committed to their large offerings, as well as to the offerings of small and mid-sized players, suggests there will be plenty of dry powder for the growth in transactions expected in the coming months.