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Volatility sets mood for PE secondaries

Yasmine Masi18 September 2023
Investment strategy

A report from bfinance has revealed the surprising opportunities in the private equity secondaries market for investors, with low pricing levels enforcing a “‘buyer’s market’ dynamic”.

The Sector in Brief: Private Equity Secondaries resource said the market had continued to develop and mature in is structure and depth, with traditional and alternative asset managers contributing to its growth.

“GP-led secondaries, whose rise has represented perhaps the most significant trend in this market over the past decade, are now fully within the mainstream,” it said.

“Indeed, we now see the emergence of a handful of secondaries funds that focus solely on GP-led opportunities; investors in these vehicles seek the higher-return, higher-risk (more concentrated) profile associated with this segment.

“Moreover, there have been developments in the nature of GP-led secondaries, with a shift away from transactions that facilitate fund wind-up towards ‘continuation vehicles’ (single or multi-asset).

“Continuation vehicles have, it must be noted, been the source of some controversy and concern: investors should handle these opportunities with care.”

The report highlighted expectations of a rise in LP-led secondaries transactions for the rest of 2023 and into 2024, with several aspects contributing to the trend.

“Declining public markets in 2022 have left a proportion of investors overexposed to private markets (the denominator effect), which may be appropriate for a moderate period of time but not over the long term; meanwhile, a slowdown in broader private equity distributions (thanks to rising rates, a tense geopolitical climate, a dried-out IPO market and more) means that less liquidity is emerging naturally from investors’ private equity portfolios than would have been expected,” the report said.

“As such, investors that wish to deploy to new vintages, fund unfunded obligations or undertake rebalancing may look to exiting some existing stakes. A serious rise in sellers of this type could exert downwards pressure on pricing.

“A rise in LP-led opportunities is of interest not only to new investors but also to existing secondaries investors who may now consider themselves over-exposed to the GP-led segment and wish to rebalance.”

“Although there is plenty of common ground with broader PE manager selection, there are a number of distinctive considerations. This is still a relatively young part of the private equity spectrum, coming into its own in the past few years: deep due diligence and manager-specific insight are essential,” Anna Morrison, Managing Director of Private Markets at bfinance, said.

“The recent growth of the market means that relevant personnel are in high demand: investors should pay close attention to the team and, in particular, their transaction skills; the analysis required for GP-led secondaries is quite distinct from that required to evaluate LP opportunities.

“Investors must watch out for concentration risks, alignment of interest (particularly on the GP-led side), the pace of distributions, potential concerns around managers’ use of continuation vehicles and the way in which leverage is used.”

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