If the prodigious rise of GP-led deals wasn’t enough to declare 2021 the year of secondaries, then the unbridled M&A activity should erase any remaining doubt. More independent secondaries firms traded hands last year than ever before.

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 manage their portfolios more actively and for GPs to find creative solutions for holding and monetising assets, laid claim to several brand name secondaries shops. The activity could well be an inflection point for the market, according to a senior lawyer.

It is not just the glut of deals on both sides of the market that has drawn attention to secondaries: rising assets under management have also played a part. Last year, $63.8 billion was raised across 77 funds – the largest number ever – following a record $98.9 billion across 63 funds in 2020 and $32.8 billion across 44 funds in 2019, according to data from affiliate title Secondaries Investor.

At first glance, the fundraising total for 2021 seems like a significant drop from the previous year. Were it not for the presence of two mammoth funds in 2020, however, the numbers would be similar. Ardian’s ASF VIII programme and Lexington Partners’ Lexington Capital Partners IX accounted for $33 billion of capital raised that year. With new monster funds in the works from Lexington, Blackstone and others, this year already has a head start.

“The activity could well be an inflection point for the market”

Senior lawyer

In comparison, $1.08 billion (the price Ares Management agreed to pay for Landmark Partners in March 2021) or $1.75 billion (the price Franklin Templeton agreed to pay for Lexington Partners in November) may not seem so outrageous. The latter transaction added, in one fell swoop, $34 billion of fee-bearing alternatives assets under management. The best investments pay for themselves (in just over five years, assuming a 1 percent management fee and no AUM growth or carried interest).

Including the Ares-Landmark and Franklin Templeton-Lexington tie-ups, there were at least nine buy-side M&A events in secondaries last year, 10 if you count advisories, thanks to Raymond James’s purchase of the London-headquartered Cebile Capital.

TPG expanded its ownership in Asian secondaries firm NewQuest Capital Partners to a majority stake in February 2021. NewQuest is one of Asia’s most prominent secondaries firms. It raised $1 billion for its NewQuest Asia Fund IV in 2019, the largest pool of capital dedicated to Asian secondaries to date.

Carlyle Group agreed to sell its real estate secondaries unit, Metropolitan Real Estate Equity, to global asset manager BentallGreenOak in March of last year. The firm raised two funds as part of Carlyle’s Investment Solutions platform: the $550 million Metropolitan Real Estate Partners Secondaries & Co-Investments Fund in 2016 and the $1.2 billion Metropolitan Real Estate Partners Secondaries Fund II in 2019.

In July, StepStone Group agreed to acquire Greenspring Associates for $725 million – $185 million in cash and $540 million in equity – plus up to $75 million in a potential earnout payable in 2025.

That same month, Paris-headquartered Tikehau Capital said it had acquired Asia-focused Foundation Private Equity. Foundation, which is based in Singapore, was founded in 2017 by Deutsche Bank’s former Asia secondaries head Jason Sambanju, and Jeremy Foo, from buyout shop Navis.

Also in July, PGIM, the asset management arm of insurance company Prudential Financial, agreed to acquire Montana Capital Partners. Founded in 2011, Montana focuses on small- and mid-sized secondaries deals in the LP- and GP-led markets. It is currently investing its €1.3 billion MCP Opportunity Secondary Program V, which held a final close in January last year.

CVC Capital Partners, the largest firm on the PEI 300 list of biggest fundraisers in Europe, confirmed it was to merge with Glendower Capital in September. Glendower is in market with its fifth Secondary Opportunities fund, targeting $3.5 billion, Secondaries Investor reported. The fund targets LP-led and GP-led deals with the ability to underwrite up to $500 million, according to its website.

Ares has also completed a tie-up with Spring Bridge Partners, as Secondaries Investor first reported in December, bringing former Coller Capital investment professionals Sebastien Burdel and Luca Salvato into the burgeoning Ares Secondary Solutions Group.

Building into secondaries

Other firms have opted to build, rather than buy, their way into this market. Brookfield Asset Management is among them. The firm is roughly halfway through raising capital for its inaugural real estate secondaries fund, with infrastructure and private equity secondaries on the way; likewise for Apollo Global Management, which burst into credit and private equity secondaries last 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 this inflection point for the secondaries market. The supply side is waning as well: Ardian is reportedly readying for an IPO, while Coller Capital has been talking to prospective buyers, Secondaries Investor understands.

There are fewer and fewer remaining independent players of scale. Preferred equity pioneer 17Capital is understood to be in talks with potential buyers, as Secondaries Investor reported in December.

Meanwhile, 52 of the 77 funds that closed in 2021 – more than two-thirds – raised less than $1 billion. The secondaries market is investing as quickly as it can raise: transaction volume more than doubled from $60 billion in 2020 to $134 billion in 2021, according to Evercore. New managers are clearly looking to step into the expanding market, but whether they can attract meaningful capital remains to be seen.

In the short term, this activity is unlikely to change the way the market trades, according to Hamilton Lane vice-chairman Erik Hirsch. Furthermore, as the secondaries market grows, there may well be room for more players. The market for ready-made brand names, track records and AUM may nonetheless soon come to a close.