The last year has not been easy for private markets managers. Secondaries is one corner of the market that has bucked the trend.
In the midst of the myriad macro-economic headwinds that buffeted private markets in 2023, the secondaries space managed to deliver year-on-year growth across most key metrics, according to Jefferies figures.
Global secondary volume climbed four percent to US$112 billion in 2023, an impressive result considering the last double-digit declines in buyout and exit deal value over the same period.
Deal activity rallied particularly strongly in the second half of the year – with H2 2023 deal value 60 percent up on figures for H1 2023 – as stabilizing interest rates helped improve LP portfolio pricing by an average of around four percent to 85 percent of net asset value, according to Jefferies. This helped to narrow bid-ask spreads and push more deals over the line.
The gathering momentum behind secondaries transactions through the second half of 2023 has carried in 2024, positioning secondaries strongly for the months ahead.
The outlook for M&A and IPO activity is brightening, but it will take time for these markets to get up to speed after a quiet 2023. LPs who have been holding out for distributions will continue to turn to secondary markets for liquidity, driving demand for secondaries investment. Against this positive backdrop, Alter Domus outlines five drivers of secondaries market activity in the coming months.
1. Resilient secondaries fundraising to drive pace of investment
Secondaries fundraising has proven remarkably resilient during the last 24 months, with Jefferies figures showing fundraising in 2023 exceeding the combined annual totals for 2021 and 2022. The amount of capital now available for investment in secondaries is more than double the amount that has been deployed in deals in the previous 12 months.
The strong stock of secondaries dry powder means that managers have ample firepower to pursue deals. This will help to improve asset valuations, encourage more sellers to market and spur investment pace and secondaries deal volume.
2. GP-led volume to rally as more deals come to market
The primary driver of the growth in secondaries deal volume in 2023 was in the LP-led deal space, which climbed seven percent year-on-year, while GP-led volume stayed flat, according to Jefferies.
Moving into 2024, however, GP-led volume is positioned for an uptick. Managers remain pressed to make near-term distributions, and GP-led deals will be a key driver for doing that.
Through the course of 2022 and the second half of 2023 a number of GP-led deals launched but didn’t get done, as the delta between buyer and seller expectations in M&A markets spilled into the GP-led space.
These assets will still be prepped for GP-led processes. Investors will be able to see how assets have traded since GP-led deals were initially launched and valuations for sellers will have improved. These themes point to a strong uplift in GP-led deal flow.
3. The rise of multi-asset continuation funds
GP-led deal flow will also be spurred by rising volumes of multi-asset continuation funds.
Fund adviser Campbell Lutyens sees a surge in multi-asset continuation funds (in addition to ongoing activity in single-asset continuation funds) as they allow managers to realize liquidity from multiple assets in single transactions, securing distributions of significance for investors.
These deals have also gained traction with buyers, who have leant into opportunities to invest in carefully assembled portfolios of assets.
4. Managers and strategies will become more specialized
In order to differentiate in an increasingly competitive market, secondaries managers will become more and more specialized – by private markets assets and type of secondaries deal.
According to Campbell Lutyens, infrastructure secondaries deals accounted for 12 percent of LP-led deals by volume in 2023, nearly triple the levels observed in 2022. The market share held by private credit secondaries, meanwhile, doubled year-on-year to four percent. The growth of secondaries deals in private markets segments beyond the historic base in buyouts will see more managers specialize to gain competitive edge in specific segments of private markets.
Similarly, many managers will also narrow down their strategic lens to focus on either GP-led deals (where the focus is on selecting and diligencing specific companies in depth) and LP-deals (where the focus is constructing large, diversified portfolios of hundreds of assets).
5. Secondaries and GP-stakes convergence?
Early in 2024 Bloomberg reported that Blackstone’s GP stakes business (which invests in the management companies of private markets firms) would shift out of Blackstone’s hedge fund division and into the firm’s secondaries arm.
Secondaries and GP stakes strategies may seem quite different on first glance, but the two strategies do overlap. Private Equity International notes that both strategies involve a combination of due diligence on the manager of a target fund and the specific assets in that fund. Bringing the two strategies together can therefore unlock data and analysis synergies. The J-curves for both strategies are also similar.
There are potential conflicts of interest that can emerge in scenarios where secondaries and GP stakes strategies are combined, but these can be addressed.
The complementarity between two fast-growing private markets verticals could see more combinations of secondaries and GP stakes strategies.
