If the massive rise of GP-led deals wasn’t enough to declare 2021 the year of secondaries, then the M&A activity that ran rampant through it should erase any remaining doubt. If you owned an independent secondaries firm this year, odds are you sold it.
As several prominent buyers put it, there was something of a changing of the guard in secondaries. Big players, recognising the nascent potential for LPs to practice more active portfolio management and for GPs to find creative solutions for holding and monetising assets, staked flags in several brand-name secondaries shops. The activity could very well be an inflection point for the market, according to a senior lawyer.
But it isn’t just the glut of deals on both sides of the market that have drawn attention to secondaries: rising assets under management have also played a part. Last year saw a record $100 billion raised for 63 dedicated secondaries funds, up from $33.6 billion in 2019, according to data from affiliate title Secondaries Investor. So far this year, 73 funds – the most ever – have raised $62 billion.
In comparison, $1.08 billion (the price Ares Management agreed to pay for Landmark Partners in April) or $1.75 billion (the price Franklin Templeton agreed to pay for Lexington Partners in November) may not seem so outrageous. The latter transaction, in one swoop, added $34 billion of fee-bearing alternatives AUM. The best investments pay for themselves.
In addition to the Ares-Landmark and Franklin Templeton-Lexington tie-ups, TPG expanded its ownership in Asian secondaries firm NewQuest Capital Partners to a majority stake in February, Carlyle Group agreed to sell its real estate secondaries unit Metropolitan Real Estate Equity to global asset manager BentallGreenOak in March, StepStone Group agreed to acquire Greenspring Associates in May, Paris-based Tikehau Capital said it had acquired Asia-focused Foundation Private Equity also in May, and CVC Capital Partners confirmed it is to merge with Glendower Capital in September.
Other firms have opted to build into the strategy rather than buy. Brookfield Asset Management is among them: the firm is currently halfway through raising capital for its inaugural real estate secondaries fund, with infrastructure and private equity secondaries on the way; as is Apollo Global Management, which barged into credit and private equity secondaries this year. KKR had been signalling it would look to either build or buy, though co–chief executive Scott Nuttall recently softened his stance.
KKR, along with EQT and Blue Owl Capital – all once rumoured to have been Lexington’s purchaser – find themselves without a foothold at an inflection point for the secondaries market. The supply side is waning as well: Ardian is reportedly prepping for an IPO, and Coller Capital has been talking to prospective buyers.
While new players will surely enter the growing market, there are fewer and fewer remaining independent players of scale – although preferred equity specialist Whitehorse Liquidity Partners, which controls more than $11 billion and has its next flagship in the market, does come to mind.
In the short term, this activity won’t change the way the market trades, according to Hamilton Lane vice-chairman Erik Hirsch. Further, as the secondaries market grows, there may very well be more room around the pie. Nonetheless, the market for ready-made brand names, track records and AUM will soon be coming to a close.