GPs and LPs lately find themselves facing a similar conundrum.
GPs want to raise new funds while maintaining the long-term upside of attractive assets they already own. But they also need liquidity – to return capital to LPs, support current portfolio companies or invest in new assets that suddenly have more compelling valuations.
They are increasingly finding a solution to this challenge in the secondary market, which surpassed $100 billion in global volume for the second straight year despite challenging economic conditions in 2022.
Nearly half of LPs that sold into the secondary market in 2022 did so for the first time, with goals such as rebalancing portfolios and generating liquidity for new opportunities, which suggests growth in this market is just beginning.
As broader macro sentiment improves, Jefferies sees continued momentum for GP-led secondaries and the most compelling window for LP-led secondaries transactions since the beginning of 2022.
Globally, the secondaries market is deep and well-established, and there are several overriding trends creating opportunities in the market in 2023 and beyond.
For GPs
Amid a tepid M&A and public exit environment, single-asset continuation funds have become the most popular way for sponsors to utilize the secondary market to manage both fund liquidity and duration – representing approximately 50% of overall GP-led market activity.
In 2022, the GP-led secondary market saw an estimated $52 billion in transaction volume, which was 24% less than 2021, but still 49% more than 2020.
Throughout 2023, we expect investor appetite to remain robust for single-asset and multi-asset continuation funds, especially as secondary funds raise larger pools of dedicated capital and new entrants in the space continue to deploy capital.
While secondary market activity was more subdued on the venture and growth side of the market last year due to widespread valuation uncertainty and an expansive bid-ask spread, there are strong indications of improving demand for those opportunities. Globally, more sponsors and VCs are using the secondary GP-led market to enhance the distribution pace to LPs, while raising additional capital to help support strong performing assets or invest in new ones at today’s reduced valuations.
For LPs
There were $56 billion in LP-led secondaries last year, down 13% from the year prior, as buyers accounted for increased market volatility, inflated private company valuations, expected delays in exits and higher underwriting hurdles. But we expect activity to accelerate in 2023 because:
- Many LPs continue to seek ways to reduce their exposure to illiquid assets and redeploy into new private equity deals or other growing strategies such as private credit or infrastructure.
- The market for LP portfolios has rebounded considerably, thanks to stabilizing NAVs and improved public markets, continued strong operating performance in many PE portfolios, and successful secondary market fundraising campaigns by many of the leading funds.
Looking Ahead
In early 2023, there were several indicators suggesting the IPO and M&A markets were ready to rebound after a difficult 2022. But then a regional banking crisis in the U.S. and the collapse of a major bank in Europe once again put many investors on edge. It was a stark reminder of the uncertainty in global markets and the necessity of investors having diverse toolkits available to navigate them.
Looking through the end of 2023, we see strong tailwinds that will nudge more LPs and GPs to use secondary transactions as an essential tool to both preserve liquidity and access to upside. Numerous LPs currently have negative net cash flows in their private equity programs, as capital calls outpace distribution activity, which spurs an enhanced need for liquidity. Meanwhile, many GPs are searching for creative ways to hold onto prized assets for longer while keeping their LPs happy. Buyers will continue to be selective, especially with year-end valuations approaching that could reset some private company valuations.
We’re seeing these trends unfold across most global markets amid plenty of pent up demand and dry powder. Together, they suggest secondary market activity is primed to accelerate in the months and years ahead.
Jefferies’s Private Capital Advisory team features 60 dedicated professions working alongside our sector bankers and regional coverage teams. In 2022, we advised institutional investors and general partners on over $20 billion of private equity secondary transaction value.