Side Letter: Blackstone’s $25bn secondaries record; EQT’s deployment cycle

The once-named 'cottage industry' of secondaries has become a 'mansion industry' this week. Plus: why EQT's LPs could get a breather between fundraises and how the private debt market is scaling up to meet the needs of private equity sponsors. Here’s today's brief, for our valued subscribers only.

Just happened

Blackstone’s latest secondaries fund: setting records (Source: Getty)

A new era for liquidity
As recently as 2012, the secondaries market was worth $25 billion in annual trades. Late yesterday, Blackstone said it had raised its latest secondaries programme that could, mathematically, back that entire amount on its own.

The asset manager’s Strategic Partners unit’s latest haul comprises $22.2 billion for its flagship private equity secondaries fund and an additional $2.7 billion for its inaugural vehicle dedicated to so-called GP-led secondaries – think continuation funds and the like. The programme – including the flagship fund in its own right – is now the world’s largest pool of capital for secondaries and, in our view, marks a new era for the strategy.

Blackstone’s raise comes off the back of data released this week showing the secondaries market clocked its second-biggest period last year. A report from Evercore, shared with our colleagues at Secondaries Investor, found that $103 billion traded hands on the secondaries market in 2022. Only 2021 was larger when $134 billion traded hands.

The question on everyone’s lips is whether this market’s exponential growth is sustainable. Former Ardian boss Vincent Gombault predicted $2 trillion in market volume by 2030, writing in a personal Q4 2021 market update seen by Side Letter, while Coller Capital founder Jeremy Coller has said secondaries funds will one day become larger than primary buyout funds. We don’t know if any number beginning with a ‘t’ is likely anytime soon, but with liquidity front of mind for institutional and non-institutional investors alike these days, larger levels of market volume seem inevitable.

Buying time
EQT‘s LPs can expect more time to breathe between fundraises. That’s because the firm’s chief executive Christian Sinding expects a return to its three-year deployment cycle in this market environment, compared with a two-year cycle more recently. “It’s quite challenging for us because you finish one fundraise and you go immediately to the next one,” he said on the firm’s Wednesday earnings call. “But it’s even more challenging for our clients because they have a setup which is based on a three- or four-year cycle.”

EQT’s investment activity dropped by 40 percent to €12 billion last year. Exits similarly fell 60 percent to €11 billion. It attributed the slowdown to broader market uncertainties creating a gap between buyer and seller expectations, and tighter financing markets limiting the scope for larger deals in particular. Although Sinding expects investment activity to remain muted in the near-term, he is optimistic about the possibility of completing more large deals than in 2022. “The size of debt available is still lower than in the boom times, but in this market, you can raise about $2 billion-$3 billion of debt, which means we can do deals on a few hundred million and possibly $5 billion,” he said. “The market is starting to be a bit open for our sweet spot range.”


More debt discourse
While we’re on the subject of debt financing, three partners from Latham & Watkins  Stelios Saffos, Peter Sluka and Alf Xue  have written a guest commentary this week for our colleagues at Private Debt Investor looking at how the private debt industry is scaling up to meet the needs of private equity sponsors. The full piece is well worth a read (registration required). Here’s a short extract:

To meet these increasing deal sizes, sponsors have been building larger clubs rather than expecting individual funds to provide sole underwrites. In turn, we see a trend towards selectivity from private debt funds in 2023.

In the largest acquisition financings, sponsors have also resorted to creative hybrid financing packages in a bid to maximise the leverage options available to them. The combination of traditional term loan A debt held by relationship bank lenders alongside tranches of pari term loan B debt placed with direct lenders has evolved into an option. This was the financing playbook used by Blackstone in the highly publicised $14 billion buyout of the HVAC division of Emerson Electric that was announced in the fourth quarter of 2022. We expect to see this hybrid structure continue to be employed for the largest underwrites at least in the first quarter of 2023.

Today’s letter was prepared by Alex Lynn with Adam LeCarmela MendozaHelen de Beer and Madeleine Farman.