Secondaries buoys total FY 2020 PE fundraising amid pandemic

Capital raising by private equity funds surpassed $500bn in 2020, the third-highest fundraising total since 2015, amid challenges posed by the pandemic.

Secondaries fundraising has more than doubled year-on-year, helping private equity fundraising to maintain recent annual levels in a year plagued by challenges posed by the pandemic.

In 2020, private equity funds gathered $535.2 billion, with secondaries funds accounting for 15 percent of that total, an increase of 9 percentage points from the prior year, according to preliminary data from Private Equity International’s upcoming Fundraising Report 2020.

By number, four of the top 10 largest funds raised were for secondaries, including vehicles raised by Ardian, Lexington Partners and Goldman Sachs Asset Management.

“Fifteen years ago, having secondaries as a first-time investment wasn’t as viable an option for investors; there wasn’t such a mature market as there is today,” Anna Morrison, senior director for private markets at advisory firm bfinance, told Private Equity International. “Now we are having discussions with clients who are getting into PE for the first time who are looking to get rid of the J-curve and change the cashflow profile.”

Capital raising across all private equity strategies in 2020 was the third highest in the past six years, even as the pandemic raged, forcing on-and-off lockdowns and remote working. The aggregate fundraising volume last year dropped 19 percent from 2019. Compared with 2018, fundraising jumped 11 percent from the $483.6 billion raised that year. This could change as the 2020 data is preliminary.

CVC Capital Partners amassed €22 billion for its eighth flagship fund – the largest fund to close last year and since the onset of the pandemic. Silver Lake held a $20 billion final close on its sixth flagship fund, making it the largest tech-focused private equity fund raised to date. Ardian raised the largest pot of capital for secondaries with its $19 billion ASF VIII programme in May. In total, the 10 largest fund closes made up nearly $137 billion or about a quarter of total fundraising in 2020.

Although 2020 represented the third-highest private equity fundraising total since 2015, the number of funds closed dipped to its lowest level over that period at 906, according to provisional full-year 2020 figures from PEI data. This demonstrates that re-ups and the flight to familiarity were favoured in a year in which LPs and GPs have had to adapt to completing due diligence virtually.

In addition to Ardian’s ASF VIII, the other standalone secondaries funds in the top 10 to close were Lexington Capital Partners IX on $14 billion, Goldman Sachs Vintage Fund VIII on $10.3 billion and AlpInvest Secondaries Program VII on $9 billion.

Overall secondaries fundraising, including real estate secondaries, infrastructure secondaries and credit secondaries, last year hit a record $95.6 billion, according to PEI data.

Several factors are driving interest in the strategy, such as investors’ needs to manage J-curves more efficiently; desire for quicker pay-outs; and ultimately, to access better yields even in the early years of a programme, according to Garvan McCarthy, head of alternatives EMEA and Asia-Pacific at Mercer.

He added that the drive for investors into the secondaries market has been for “more efficient portfolio management rather than a replacement or a lack of credible and quality options in the primary market”.

The secondaries market is expected to continue to grow into 2021, particularly in the GP-led sector, with increasing LP appetite for the strategy, bfinance’s Morrison said. She added that from a portfolio construction perspective, the way LPs invest in private equity is shifting.

“Maybe you start with a secondaries commitment as you build out a more tailored programme, and funds come in a bit later, which is something that would not have happened 10 or 15 years ago,” she said.

Geographic allocations of capital remained consistent in 2020. Funds raised by North America-focused managers made up 38 percent ($202.9 billion) of fundraising.

Almost 12 percent of capital raised had a sole focus on the European market, while Asia-Pacific funds made up 10 percent, also roughly similar to the previous year.

Look out for our interactive fundraising download in the coming week.