The secondaries market looks set to exceed $100 billion in volume for the first time this year, with the GP-led market picking up from where it left off in 2020 and LP portfolios returning with vengeance. Here are a few predictions for the market in the year to come.
New types of investors will back GP-led deals
Advisers often point to a shortage of capital as the main impediment to the growth of the GP-led market. According to Rodney Reid, managing director and global head of private funds advisory at Moelis & Company, this should improve in 2022 as buyout funds and limited partners with direct investing capabilities see the benefits of investing in the market.
“Diverse investors will also nudge faster evolution of transaction structures and terms to better suit non-PE assets,” he said.
Daniel Roddick, founder of advisory firm Ely Place Partners, also envisages a push into non-PE assets classes such as debt, preferred equity and NAV-based lending, as well as technology.
“We anticipate some sellers may want to take advantage of the available liquidity to lock in the TVPI when otherwise liquidity [from tech investments] may be a few years off. The current pool of buyers for venture is a relatively small subset, but we expect this to grow in 2022,” he told affiliate title Secondaries Investor.
A liquidity crunch will hit the PE market, with consequences for secondaries
Private equity has become a victim of its own success, hit by a double whammy of rising unrealised value and GPs returning to market more quickly with new funds. “That is going to create a very challenging 2022 fundraising for GPs,” said Yann Robard, managing partner of Whitehorse Liquidity Partners.
This could work in the favour of the secondaries market, according to David Atterbury, a managing director with HarbourVest Partners.
“Investors may feel pressure to continue allocating, given the sheer volume of funds on offer,” he said. “As a buyer, this represents a huge opportunity as investors look at alternative ways to free up allocations, with secondary liquidity being an attractive way of achieving that through 2022.”
Buyout influence to grow in GP-led market
In 2022, GPs may come to realise that they can circumvent traditional secondaries capital by running processes of their own, according to Nicole Washington, a partner with law firm Kirkland & Ellis. “If you look at how much capital is going into these and how compelling they are, you can imagine why some sponsors would say, ‘You know what? Why not go out to our own investors and raise a vehicle that can do these?’” she told Secondaries Investor.
There will be an increasing use of minority sales to validate valuation in GP-led processes, another example of the world of primary private equity imposing its influence on the secondary side, according to Nadira Huda, a director with Lazard.
“This has been used in a number of instances where there is a significant disconnect between the carrying value the sponsor’s reporting and the intrinsic value of the asset under a traditional sale,” she said.
While this can be a useful way to establish price and ensure a fair value for existing investors, some secondaries buyers that prefer to set price themselves are hesitant.
“In these transactions in particular, the lines between a secondary and co-investment are blurred, and investors tend to consider these opportunities out of both pools,” Huda said.
How much will transact in 2022?
All of the sources we spoke with agreed that, barring an event like another global pandemic, secondaries transaction volumes will hit new highs in 2022. Proskauer partner Michael Suppappola predicts total deal volume “in excess of $125 billion”, driven by a resurgent portfolio market, the continued success of GP-led deals and the growth of credit and preferred equity.
Mike Bego, managing partner at Kline Hill Partners, is even more confident, expecting volumes to approach $140 billion by the end of this year.
Cari Lodge, managing director of Commonfund Capital, takes a compelling, if more conservative, line. “I think easily in the next five years this market is $250 billion, which is a pretty low number compared to what some other people are predicting,” she said.
Michael Baruch, Rod James and Adam Le contributed to this story.