Last year was another record year for the secondaries market, with transaction volumes exceeding $80 billion for the first time. Still, compared with the expectations of many in the market going into 2019, it was slightly disappointing.
Second-half deal volumes exceeded first-half volumes by 10 percent, compared with a 111 percent jump between H1 and H2 in 2018, according to adviser Greenhill. In Greenhill’s estimation, the proportion accounted for by general partner-led deals actually declined slightly, though Evercore drew the opposite conclusion.
One thing that didn’t disappoint was the quality of GPs that came to market. TPG, Accel-KKR, Blackstone, PAI Partners and Warburg Pincus were among the firms to carry out GP-led secondaries processes during the year. Teacher Retirement System of Texas, Korea Investment Corporation and Norinchukin Bank – which made the largest ever portfolio sale at $5 billion – were among the LPs to execute vanilla deals.
Secondaries fundraising in 2019 was down on the previous two years, with
$36.9 billion raised across 32 final closes. A stronger second half and a flurry of final closes in the first weeks of January 2020 suggest this is a temporary dip. The 10 largest funds in market were targeting $72.5 billion and had raised $36.6 billion through interim closes as of 1 January, according to data from sister title Secondaries Investor.
So, what’s in store for 2020? Here is a selection of Secondaries Investor’s predictions for the coming year, taken from hit video ‘What’s in store for the secondaries market in 2020?’.
Liquidity options to become the norm
This year could be the one in which liquidity solutions become a formalised part of a general partner’s offering, said Nik Morandi, senior principal with Canada Pension Plan Investment Board. Rather than just giving LPs the chance to gain liquidity through a tender offer, a GP will initiate a “programmatic and guaranteed liquidity mechanism on behalf of its LPs on an annual or even a bi-annual basis,” increasing even further the turnover ratio of the asset class.
The conditions are brewing for consolidation in the secondaries market, according to Carlo Pirzio-Biroli, managing partner and chief executive officer of Glendower Capital. “One of the few large remaining independent secondaries houses will be purchased by a large alternatives platform,” he said. “That’s driven by large platforms continuing to grow AUM and add business lines, and taking advantage of succession considerations that emerge occasionally with independent managers.”
Effectively connected income regulations came into force in 2018. They mean that non-US sellers of stakes in limited partnerships that have exposure to a US trade or business – even as little as $1 – can be subject to a 10 percent tax on their realisation. Thus, if you are buying a stake in a fund, you need to seek assurance from the seller or the GP in the form of a certificate that no assets are exposed to the US, or if they are, be prepared to withhold 10 percent of the purchase price for the Internal Revenue Service. According to Ted Cardos, a partner with Kirkland & Ellis, ECI is likely to cause its share of headaches in 2020.
“That uncertainty, coupled with their lack of experience with the IRS generally, will I think result in many GPs refusing to consent to transfers next year,” he says.
All eyes on Europe
Europe could offer investors better “relative value” in 2020, a result of macroeconomic and geopolitical uncertainty, says Valerie Handal, managing director with HarbourVest Partners’ secondaries team.
“It could create exciting opportunities for buyers who have the knowledge, the experience, the resources and frankly the patience to peel back the onion and perform deep due diligence on opportunities,” she says.
A ‘Vegas buffet’ in 2020
This year will be the first $100-billion-plus year, with more than $60 billion of that coming in North America, says Anthony Shontz, managing director and co-head of private equity integrated investments Americas at Partners Group. Most volumes will be on assets of vintage 2012-2015, GP-led volumes will stay around 40 percent of total volumes, and pricing will continue to decline in line with greater volumes.
“Overall, 2020 will be like a Las Vegas buffet – the selection of entrees will be overwhelming, buyers will be able to make selections tailored to their appetites … There’ll still be a lot of food left over that does not get consumed,” he says.
Fewer single-asset deals
Last year was the year of the single-asset deal. In 2019, volumes more than doubled from $2 billion to $5 billion in year-on-year terms, according to data from Evercore. This may not continue in 2020, says Isabel Dische, a partner with Ropes & Gray, as concerns around the concentration risk they represent come to the fore.
“[We are likely to see] a reversion away from 2019’s marquee single-asset deals towards more classic portfolio sales,” she said. “The former can be accretive for GPs but have proven to be a bit challenging for many buyers and their underlying LPs.”
Top five deals of 2019
1 The €2 billion restructuring of PAI Partners V
In April, Secondaries Investor reported that PAI Partners, one of Europe’s largest private equity firms, was to restructure its 2008-vintage Fund V. Working with Evercore, the firm gave LPs the opportunity to sell to secondaries buyers or roll into a continuation vehicle containing two companies, including jewel in the crown Froneri, the world’s third largest ice cream maker.
AlpInvest Partners, HarbourVest Partners and Goldman Sachs Asset Management all led on the €2 billion deal, committing €300 million each, alongside 45 other investors. Exiting investors received 7x on their stake in Froneri, Secondaries Investor understands.
2 Norinchukin Bank’s sale of a $5 billion portfolio
In March, regulation compelled Japanese cooperative Norinchukin Bank to sell $5 billion-worth of private market stakes, the largest ever LP stake sale. The bank worked with Greenhill to offload the portfolio, which contained around 100 fund stakes, 75 percent of which was unfunded, Secondaries Investor reported. Ardian underwrote the whole lot, suggesting the firm’s latest fund ASF VIII, which when closed will be one of the largest ever private equity funds, will have no trouble putting its $12 billion war chest to work.
3 Manulife’s $1.7 billion portfolio sale and spin-out
In August, Manulife used the secondaries market to open itself up to third-party investors. Canada’s largest insurance company sold a $1.7 billion private equity portfolio off its balance sheet into a vehicle managed by the Manulife Private Capital team and backed by AlpInvest, which underwrote and syndicated the deal. The quality of the portfolio was noteworthy: 50 US mid-market private equity funds from managers such as Thoma Bravo, Apollo Global Management, Clayton, Dubilier & Rice and Audax. Campbell Lutyens advised on the deal.
4 Warburg Pincus’s $1 billion single-asset restructuring
In May, Secondaries Investor reported that Warburg Pincus was to carry out one of the largest ever single-asset restructurings. The New York-headquartered buyout firm, working with Lazard, lifted portfolio company Allied Universal out of its 2012-vintage fund and placed it into a $1 billion separate vehicle backed by a group of more than 20 investors led by AlpInvest. Although such deals tend to be reserved for funds near the end of their lives, Warburg only acquired the security services provider, one of the fund’s top-performing assets, in 2016.
5 Insight Partners’ $1.5 billion restructuring
In a deal first reported by sister title Buyouts, tech investor Insight Partners took more than 30 companies from seven different funds and transferred them into a $1.5 billion continuation vehicle. HarbourVest Partners and Coller Capital led the deal, with Hamilton Lane and Partners Group among the other backers. Insight received $150 million in additional capital to help develop the portfolio. The Lazard-advised deal was notable for its size, structural complexity and quality of the assets involved.