The past 12 months were defined by a pandemic-induced market shutdown, the explosion of preferred equity and a raft of giant of GP-led deals. Here are a few predictions for the market in the year to come.
Volumes to bounce back, perhaps to record levels
Secondaries deal volume in the first half of 2020 stood at around $18 billion, a 56.1 percent decline on the same period a year earlier as the coronavirus crisis brought the market to a standstill, according to investment bank Greenhill.
Advisors’ early estimates of full-year volume have differed greatly. Placement agent and advisory firm Cebile Capital recorded $39 billion of deals, nearly half of that seen in 2019, while Triago posited that a huge second half pushed full-year volumes up to $71 billion.
Both agree that pricing is strengthening, many secondaries funds are behind on their commitment pace and there is a lot of dry powder earmarked for the strategy – $153 billion, according to Triago.
“With so much private equity activity put on hold by covid-19, 2021 could set fundraising and secondary records,” the Paris-headquartered advisor concluded.
Several buy-side sources share this view, including global head of Blackstone’s Strategic Partners unit Verdun Perry, who predicts total secondaries volume will surpass $100 billion for the first time.
GP-leds will become even more popular, and the character of the market will change
Market participants have been predicting that manager-initiated deals would come to account for half of all secondaries volume before 2025. It could happen sooner, according to several sources.
With the market for trade sales and initial public offerings still subdued, GP-led deals will become an increasingly popular exit option, perhaps even the most popular, according to Unigestion‘s head of investment solutions Paul Newsome.
Unlike in 2020, when buyers honed in on high-quality, low-risk deals, 2021 is likely to bring more transactions to market with a bit of “hair on them”, said Rune Munk, a partner with secondaries firm Coller Capital, referring to transactions involving assets that may have experienced challenges due to the pandemic.
“They are equally interesting if the underlying quality is there, as you can be rewarded for the complexity, but as a buyer you need to work harder to ensure you’re picking the winners,” he said.
A flood of new buy-side entrants
For the past couple of years, advisors have bemoaned the lack of capital to digest all the single-asset deals that could be executed. That could be changing, with the potential for as many as 20 entrants to the market over the next 12-24 months with the ability to “underwrite meaningful portions of transactions”, said Lea Lazaric Calvert, senior managing director at Evercore.
This view is shared by Andrew Rearick, international counsel with law firm Debevoise & Plimpton.
“When we reach the end of the year and look at fundraising activity for secondaries across all markets, we may be surprised by the impact new entrants have had, particularly new entrants focused on specific segments of the secondaries market.”
Private credit to take off
The still-depressed real economy could propel activity in the credit secondaries market, GP-led deals in particular, said one New York-based legal partner.
“I’ve had calls with a number of private credit managers in the last few months trying to figure out if a GP-led deal is right for them. You have a lot of distressed assets in funds that got brutalised over the last eight months, but there are still some diamonds in the rough – what do you do with them?” the legal partner said.
There should be no shortage of buyer demand, given the performance of the asset class in prior downturns, according to Richard Hope, Hamilton Lane‘s EMEA head.
“Private credit has historically, generally outperformed even private equity [in a downturn] because of the place you are in the capital stack … If you’re in first lien, second lien or even mezzanine you have a whole chunk of equity protecting you.”
Keep your eyes on Asia
As a percentage of global deal volume, Asia-Pacific may not have grown much over the years, but it is throwing up some eye-catching and innovative deal types. In 2020 several yuan-to-dollar restructurings closed, giving the GPs involved access to US dollar capital while allowing them to hold on to early stage and growth assets for longer.
An ongoing need to address “high-value, low DPI situations” in markets such as India and China and deals in sectors such as healthcare and education should continue to provide dealflow for buyers, according to Nick Miles, head of Europe and Asia-Pacific in Lazard‘s private capital advisory group.
Read ‘Get ready for a year like no other in 2021’ on sister title Secondaries Investor for more on what the year might bring.