P R I VAT E E Q U I T Y W I R E
I N S I GH T R EPO RT
Ho ld in g O n :
H OW VO LATILITY W IL L D R IVE G P -LED S ECO N D A R IE S IN 2022 M A RCH 202 2 SUPPORTED BY:
C ON T E N T S
KEY FINDINGS VOLATILITY WILL DELIVER HIGHER QUALITY ASSETS A more difficult trading environment will encourage GPs to safehouse their most prized assets in continuation funds, which now comprise almost 90% of the GP-led market. But in a cautious and capital-constrained buyer’s market, industrial strength assets with growth potential will be favoured. Following a spike in large, single asset structures last year, GPs are also turning to multi-asset continuations in 2022 GP-LED SECONDARY MARKET WILL EXCEED USD125BN BY 2025 Since the pandemic – when GPs turned to the secondary market for liquidity – the GP-led segment has tripled in value to USD 60bn last year, balancing the LP-led secondary market. As an increasing number of GPs attempt their first secondary trades and the middle-market opens up, exponential growth is expected in line with primary activity SECONDARY PRICING LOOKS PAST A LAGGING NAV With fund net asset values (NAV) not accounting for recent movements in the public market, those involved in single-asset continuations are using a bottom-up M&A approach during price discovery. Average secondary pricing was around 97% of NAV in the last quarter of 2021 but in some current GP-led transactions, the NAV is not even being disclosed to potential buyers, with other metrics favoured NEW RULES ARE BEING DRAWN UP TO PROTECT LPs Around a third of existing LPs will typically roll into a continuation fund rather than exit, but LPs in the GP-led secondary market generally are not always being granted enough time to decide on their options, say sources. New guidance from the ILPA and proposals from the SEC could help to streamline the process and accelerate further growth in dealflow
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Fundraising Interviews Investment
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Valuation Advisers Technology
Regulation P R IVAT E E QU IT Y W IR E IN S IG H T R E P ORT
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WHY PRIVATE EQUITY FUNDS
ARE NOT LETTING GO Since the pandemic, GPs have been holding onto their trophy assets for longer. A jump in single-asset continuation vehicles is opening up buy-side opportunities for funds and investors
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n less than 20 years, private equity’s secondary market has moved from the dusty corners of the industry into the everyday conversation of general partners and their advisers. Secondary funds currently being raised by Blackstone’s Strategic Partners, Ardian and Lexington Partners are targeting between USD 15bn and USD 20bn, making them comparable to some of the largest buyout strategies of the past few years. At scale, such funds have traditionally targeted both LP and GP secondary fund stakes, but as LPs held back from distressed sales during the pandemic, GPs stepped forward to raise liquidity and rebalance their portfolios – bringing a wave of single assets, multiple assets and other structures to the secondary market. Rather than slowing as the pandemic
fades, this GP-led phenomenon is set to grow exponentially as more GPs become familiar with the tools and structures involved, say sources. “I would say that the evolution of the GP-led market is the single most important development in the secondary market since its inception. It’s a game-changer for the secondary space and the growth is driven by the multiple benefits that GP-led deals can provide,” says Jeff Keay, managing director and chair of the secondary investment committee at HarbourVest Partners, which is targeting USD 13.5bn for its latest secondaries vehicle according to Pitchbook. In addition to generalist private equity secondary funds, dedicated GP-led funds have been recently launched, closed or are in planning by Pantheon Ventures, LGT Capital Partners and
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Do you see continuation vehicles as a viable alternative to the sale/exit of an asset(s) in the current market? No 4%
Asset managers want to keep assets under management and get paid for that. Continuation vehicles also allow you not to sell to a competitor
Yes 96%
Source: Private Equity Wire GP survey, March 2022
Would you use this structure for a single asset, multiple assets, or both?
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Single asset 16%
Multiple assets 4%
Both 80%
Source: Private Equity Wire GP survey, March 2022
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Manulife Investment Management, the investment unit of Canada’s largest insurer, among others. According to varying estimates, GPled secondaries will represent between half and two thirds of a secondary market worth around USD 250bn by 2025. If correct, this would be a doubling in value of the current GP-led market. Over half of all private equity GPs have now executed a secondary process, according to analysis by Raymond James, and the remaining half are either already in the process of following or will follow in the years to come. For the most common type of GP-led secondary – the continuation vehicle – the more cynical point to an obvious motivation: the opportunity for GPs to reset fees, crystallise carry and hold onto part of a trophy asset until a more profitable exit can be realised in the future. “Asset managers want to keep assets under management and get
paid for that,” says a US-based advisory source. “But, also, it allows you not to sell to a competitor.” In an increasingly volatile market – rocked by crashing tech stocks and war in Ukraine – such a strategy makes even more sense. But, beneath the surface, the trend is also rewriting the relationship between GPs and their LPs and opening the door to a new wave of secondary buyers through syndications and co-investment.
Zombies to trophies
Originally GP-led secondaries were used by ‘zombie funds’ opting to sell or restructure their least-wanted assets so their LPs could exit at fund maturity. But over the past three years, as fundraising cycles have accelerated, GPs have been less willing to let go of trophy assets as they move onto a new fundraise. “One of the biggest criteria when you’re a GP is ‘how do I grow my assets under management? How do
I deploy my fund quickly and come back to market and raise another fund so then I have more fee-paying assets under management?’” says Sunaina Sinha Haldea, global head of private capital advisory at investment bank Raymond James. “Continuation vehicles are a great way to increase your fee-paying AUM without having to increase costs and hire a new fund team.” According to private markets adviser Campbell Lutyens, around 88% of GP-led secondary transactions are now continuation vehicles, splitting roughly equally between single asset and multiple asset structures. In 2021, the total value of these continuation vehicles was USD 42bn – a 55% increase on 2020 and a 180% increase on 2019, according to Raymond James. The USD 42bn figure represents the value of the stakes sold plus any additional capital raised to invest in the companies. Many in the market agree that continuation vehicles will now grow
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GPs will remain largest secondary sellers in 2022 80% 70% 60% 50% 40% 30% 20% 10%
2021
Corporates
Endowments and charities
Insurance companies
Family of ces
Banks
0 Fund of funds
“As in any market, you have opportunities that are less attractive, but there are more than enough quality transactions coming through the pipeline, especially on the single asset GP-led deals, as that is still only a 12 to 18-month-old market. The fundamentals for the supply are so strong: GPs understand it now, they’ve tried to do with their best assets, they will continue to do so. From a technology point of view, they’ve tested it so they will be coming back for more.” Yet for the secondary buyers investing in such continuation vehicles, there is a catch: many of them – secondary funds which have been in the market for decades, for example – are unable to invest large amounts in these single asset continuations. Over the past year, the average continuation fund deal size stood at
Sovereign wealth funds
Concentration limits
USD 1.1bn, says consultant Hamilton Lane. In December, Clayton, Dubilier & Rice completed the largest single asset continuation to date at a value of around USD 4bn for glass repair company Belron, while also using the M&A market. General Atlantic and Goldman Sachs also ran large continuation processes for their assets last year. For the buyers – a limited group of secondary funds with single asset concentration limits – there is an increasing need to bring co-investors into the process with them. There are 66 lead buyers in the secondary market today, says Haldea, adding that the number of single asset lead buyers is just shy of 40. Such concentration limits may hamper growth of the single-asset secondary market, says investment bank Greenhill, but it expects this to be partly alleviated by existing players raising new pools of capital dedicated to the strategy. Such concentration limits are also
Pensions
to the market,” says Hani El Khoury, partner at Coller Capital.
GPs (direct investors)
in size and number, particularly as volatility makes an exit through IPO or the M&A market less certain. In its latest private equity report published in March, Bain & Company explains that dependable multiple expansion has enabled firms to buy a company, lever it up, and get out sooner, moving on to the next deal but the exception has been where they divest a large portion of equity and hold onto a slice of the company to capture even more multiple expansion. “The question now,” says the firm, “is what happens to this formula in a more volatile environment, when cycles are more jagged and selling early is no longer so advantageous?” One answer almost certainly lies in the secondary market, and with the growth of continuation vehicles more specifically. “I think that the volume of continuation vehicles will continue to be strong, because I suspect there will continue to be quality assets coming
2022 (expected)
Source: Setter Capital Volume Report FY 2021
NO EXIT: PRIVATE EQUITY’S MEGA IPO TREND MAY HAVE HALTED Last year set a new record for large private equity-backed IPOs but recent volatility in the stock market will make fund continuations and the secondary market a more attractive option in 2022, say sources and analysts covering the sector. “Market conditions have been volatile so far this year, driven by the threat of additional rate hikes,
slowing growth from continued supply chain issues, inflation and geopolitical tensions. As a result, many investors could be less willing to publicly list their companies, and those that do could have to grapple with lower valuations as stock prices take a hit,” wrote Pitchbook in March. In total, 75 private equity-backed companies listed at valuations
above USD 1bn in 2021, according to Pitchbook data. This was almost triple the same number in 2020 and by far the highest since the financial crisis. Their USD 255bn combined exit value represented almost half the total value of mega exits by private equity firms in 2021. IT companies accounted for more than a third of this group, closely followed by healthcare companies.
“We have observed increased market volatility that will likely slow down the exit environment in the short term so GPs may be more tempted to make greater use of the opportunities within the secondary market,” says Alex Bozoglou, head of investments at private markets fund platform Titanbay. In truth, the mega IPO trend already looked shaky during the
second half of 2021, with UK roofing company Marley and fitness chain Pure Gym both shelving plans to go public. Other highprofile listings have failed to meet expectations, with shares falling in the first days of trading. GPs will be watching public market valuations closely for signs of stability during the remainder of 2022.
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A PREFERRED TASTE: OTHER GP-LED STRUCTURES Continuation vehicles are not the only liquidity tool GPs have learned to handle over the past two years. Fund financing – which started with preferred equity transactions and expanded into a rise in net asset value (NAV)-based lending – has moved from being a footnote in the secondary market handbook to a tactical weapon which can allow GPs to plug liquidity holes or bolt-on acquisitions when LP commitments are already tied-up. With a potentially lower cost of capital than ordinary equity and significantly more flexible than debt capital, preferred equity providers are given priority on distributions until they receive proceeds from the underlying portfolio. NAV lending can often resemble a term loan in structure and is typically geared to the net asset value of the fund. Back leverage through a NAV loan, on top of a portfolio company’s debt, can often be used to supercharge returns or provide distributions to LPs without the sale of
assets. In the summer of 2020, after the pandemic hit, specialist portfolio financier 17 Capital said it provided USD 1bn to private equity managers in just a few months. In the second half of last year it announced partnerships with five top-tier, US-based private equity firms to address “strategic objectives in relation to franchise growth and ownership transition” and in March it was acquired by Oaktree Capital. Many other specialist finance houses are now targeting the space but the deals executed or supported tend to be relatively opaque or go unreported. Similarly, while continuation funds for large single assets are often easier to spot in the secondary market, GPs can quietly execute smaller portfolio strip sales, tender offers to LPs and stapled transactions (where a GP sells secondary interests in a fund to a buyer which makes a primary commitment to another fund managed by the GP) without too much attention.
Largest secondary funds in the market Fund name
USD bn
Status
Strategic Partners IX
20
Fundraising
Lexington X
15
Fundraising
Landmark XVII
6
Fundraising
ICG Strategic Equity Fund IV
5
Fundraising
Whitehorse Liquidity V
5
Fundraising
Coller International VIII
9
Final close
(LGT) Crown Global V
4.5
Final close
Whitehorse Liquidity IV
4
Final close
Hamilton Lane V
3.9
Final close
BlackRock Secondaries & Liquidity Solutions
3.1
Final close
Source: Greenhill, Preqin
opening up the GP-led market to a more diverse set of investors. “I think it’s an opportunity for new entrants into the market,” says an adviser in the space. According to Hamilton Lane, 26 of the 38 GP-led deals it reviewed over the past year had multiple secondary buyers as lead or syndicate investors. “You have more complex deals requiring multiple lead investors being brought to a market defined by a small set of resource-constrained secondary firms,” it says. “This dynamic is affording certain secondary buyers the ability to be
selective and gain access to an increasing number of deals on a noncompetitive basis.”
Multi fashion
GPs considering continuation vehicles in 2022 will continue to face buyer selectivity as the number of assets coming to market grows but, due to the oversupply of single secondary assets in 2021, many have already pivoted to multi-asset processes. “It’s like somebody flicked a switch at the end of last year,” says Michael Pilson, partner at private equity advisory firm Triago. “Single assets are
a little out of fashion now and I think that volatility in the public markets and war [in Ukraine] has really exacerbated that.” A change in preference will not deter the GP-led market expanding on both the sell-side and the buy-side, but as the range of buyers expands – in some cases to include pension funds, sovereign wealth funds and traditional LPs – some of these investors are questioning whether the process now looks less like a complex secondary transaction and more like a direct investment they could potentially execute on their own. Made with
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SECOND THOUGHTS:
TWO GPS IN CONVERSATION
NASH WATERMAN, HEAD OF PRIVATE EQUITY SECONDARIES , MORGAN STANLEY INVESTMENT MANAGEMENT
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organ Stanley’s secondary team focuses only on single asset GP-led transactions and looks for these in developed buyout and growth markets. It has deployed more than USD 4.8 billion to over 220 secondary transactions, including having committed over USD 2.7 billion to 46 GP-led transactions, as of the end of last year. Nash has 18 years’ industry experience and here he explains why the GP-led market will continue to grow in 2022. Do you think 2022 will be remembered as another year of growth in the GP-led secondaries market? Despite the volatility, it has not put a hiccup in the growth. GP-led has been a trend that accelerates with every economic shock. Every time we’ve had a big shock, this market has to grow and the volatility will continue to make the deals climb up the quality spectrum and cause the lower quality deals to fall away more easily. I think the biggest opportunity in 2022 is buy-and-build. GPs can actually buy through the volatility: if businesses are suffering this year, a well-positioned buy and build [GP strategy] can actually help businesses that otherwise would go bankrupt by
folding them into their [strategy]. We’ve seen this trend continue to increase and then to accelerate during periods of volatility, especially in the lower middle market. Around a third of existing LPs typically roll into a continuation fund. If the quality of GP-led assets continues to increase, as you say, do you see a higher proportion of LPs deciding to roll and what challenges does this present? I think [they will] and I see that as a very positive thing because there is a definitive capital shortage for these deals. I’d be shocked if it got beyond 40-45% [of LPs staying in the investment] because particularly for high quality deals they also tend to have high valuation marks so there’s always the attraction just to take the chips off the table and that won’t go away. In terms of the capital constraint, do you see more market entrants arriving to invest in some of these continuations? There are a number of players looking to fill that gap but structurally it has been moving slowly. We have a team that is built purely to do single assets – we came to that decision about seven years ago – and that’s allowed us to
extend into the market more quickly. The challenge for other groups is fitting this into their existing programs, because single asset GP-led deals are not a natural association with buying LP interests. I think there will need to be fragmentation in the market, as there has been with venture and infrastructure secondaries, and you will see investors demand to have either LP interests or GP-led, or even just single asset GP-led deals, instead of everything mixed-up in one secondary fund. [But] it’s going to take a long time for that to happen. Given that you are focused on single-asset continuations only, how to you balance concentration limits on assets of scale? Our target is to get 25 positions of meaningful value in our portfolio. That means positions of 4% to 6%. To me that’s properly diversified, while leaving a big upside and you actually control the risks. We are also driven by a bottom-up philosophy: we’re looking for lower middle market businesses with essential products and services to stable markets. It makes us light on technology, lighter on financials, heavier on consumer business services. And we also will only invest in places where we can cheaply hedge out currencies.
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PE T R A B U KOVE C , PA RT N E R , PA N T H E O N ’ S G LO B A L S E CO N DA R I E S T E A M
P
antheon is well-known in the GP-led secondary market and has deployed a total of USD 3.6bn to 37 GP-led transactions since 2010. In October, it achieved final close on one of a growing wave of specific GP-led fund platforms, Pantheon Secondary Opportunities Fund. With 11 commitments already announced through the platform, Pantheon is also growing the secondaries team quickly and last year brought in five new hires. This March, Amyn Hassanally was named as Pantheon’s new global head of private equity secondaries after almost 17 years at Coller Capital and will join the firm during the second half of 2022. Petra has spent more than 15 years at private equity firm Pantheon Ventures and has been a member of the secondary team for most of that time. What impact will current macro volatility have on GP-led transactions? On the GP-led side, where you have more concentrated exposure to
an underlying asset or assets, the impact on valuations will depend on the specific exposure and it may not be as significant as it could be in the broader market. At the same time, deal flow for high-quality, resilient assets, managed by high quality GPs – the star assets – will continue. There is, however, likely to be more impact on transactions where assets are more exposed or where the quality is not as high. Will concentration limits restrict the number of large single assets entering the secondary market in 2022? Secondary capital available for single asset secondary transactions is significantly below the supply of deals in the market, with a limited number of players able to underwrite more than USD 100m in individual transactions. As such, there is a limit on the maximum size of single asset deals – I don’t think there is currently capacity to underwrite USD 5bn or USD 10bn value deals. This will obviously change over the coming years as the market matures and further capital is raised.
Do you see an opportunity for new secondary funds and buyside investors, for example as part of a syndicate on larger deals? The market for GP-led deals is still quite immature: there are estimates that around half of the topquality GPs have tapped into the secondary market, so I think there’s a lot of growth to come. In order to see continuous growth in the GP-led market, and especially in order to increase the number of large cap deals, capital available will need to increase. This capital will, to a certain extent, come from new secondary funds raised and new players entering the market, but also from primary-type capital participating as syndicate players alongside lead investors. It will be interesting to see how the syndicate market develops – how does that compare to the co-investment market and how do the economics for the GP led deals develop over time as the market matures and grows? Pantheon seeks to play a lead or co-lead role in GP led deals
We tend to focus more on mid-market deals, where capacity is constrained and where often there is little or no capital
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If the GP is not investing a meaningful amount of their own money in a deal, we will step aside and not pursue the transaction
and we have done so on about three-quarters of the GP-led deals we’ve completed. This allows us to set the pricing, structure the transactions, as well as ensure our allocation is protected. We tend to focus more on mid-market deals, where capacity is constrained, where often there is limited or no capital available and required to be underwritten by syndicate investors, so this is not as much of a factor as it is on the larger end. Do you see GPs bringing other structures to the secondary market this year, aside from continuation vehicles? Continuation vehicles can come in many forms and can hold single asset secondaries, portfolios of assets, as well as strip sales or
preferred equity type structures. I do believe that we will continue to see growth in all of these types of these deals. The majority of GP led transactions we have completed are either single asset secondary transactions, portfolio deals or full fund restructurings. We have considered and invested in strip sales, but in such deals the alignment often isn’t as strong, which makes them more difficult. Preferred equity deals on the other hand have a different risk/return profile, which often doesn’t meet the threshold return of our private equity secondary fund. In summary, what we are looking for is investing in top quality assets, managed by high quality GPs, with whom we have a good
alignment – and if the deals have such features, the structure around them isn’t as important. Are you seeing more GPs investing more of their own money into continuations and how important is this to the buyside? Alignment is a topic that we pay very strong attention to and that is very important. In terms of how we view these transactions, the GP is a partner – we recognize that they know the asset better than we ever will, so them reinvesting alongside us is extremely important. As such, if the GP is not investing a meaningful amount of their own money in a deal, we will step aside and not pursue the transaction.
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HOW GP-LEDS WILL APPROACH A
CAUTIOUS BUYER’S MARKET IN 2022 Secondary assets being brought to market this year will require industrial strength and value creation potential, as infrastructure, VC and mid-market GPs plan to bring opportunities to market
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n stark contrast to private equity’s buyout market over the past decade, GP-led secondaries are often characterised by too many deals chasing too little capital. “Sometimes we feel capitalconstrained because there’s so much opportunity out there,” says Valérie Handal, managing director of the global secondaries team at HarbourVest. With the eight largest secondary funds controlling around 50% of the dry powder in the market, according to Hamilton Lane, GPs are having to carefully consider what assets to bring to these buyers and in what form. Last year, multi-asset continuations represented 42% of deal volume, according to investment bank Greenhill, but it also noted an increase in more concentrated multi-assets CVs (holding only two or three assets) along with a rise in the proportion of single-asset
transactions, from 31% of the market in 2020 to 39% of GP-led volume. Many of the single-asset continuations completed in 2021 were primarily in high-quality, COVIDresilient and growth sectors, it found. Though the pandemic-spurred liquidity raises of 2020 now appear to be fading, strategic drivers, familiarity with the concept and macro uncertainty will increase the attractiveness of using continuation vehicles as safe harbour and surgical portfolio management, say sources. In a survey carried out by Private Equity Wire in March, 96% of respondents said they considered continuation vehicles to be viable alternative to the sale/exit of an asset(s) in the current market and 80% said they would use the structure for both single assets and multiple assets. It is less clear how their attitudes have changed to particular sectors and which assets will be favoured
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GP-led activity will be more subdued on technology assets this year. Perhaps consumer or retail could be more attractive
by secondary buyers in a more volatile market: when asked ‘what types of assets do you see coming to the secondary market in 2022?’, the same survey respondents cited everything from energy to healthcare to technology. In reality, for single-asset continuations at least, some processes that have already begun may now face delays or repricing at a different level than they would have achieved last year. But others, even in technology, are showing little correlation with shock movements in the public market. “We’ve approached Q1 with a lot of caution,” says Hani El Khoury at Coller Capital, “and I think we will continue to do that. Now is the time to be very cautious on valuations across sectors. In terms of what we are looking at, I would focus more on profitable growth rather than growth at all costs.” “[The volatility] is making people pull back, go a little slower, be a little bit more methodical, and that’s going to have an effect on valuations across the board,” says Michael Pilson at
Triago, adding that a recent tech sell-off in the public markets has given secondary buyers pause but these assets are expected to return once volatility lessens. Demand in some sectors is more robust. “There’s just a ton of demand for healthcare,” says Pilson. “I think secondary buyers are very much looking for exposures to the themes that have been driving primary fundraises, where they might have missed out.” GP-led activity will be more subdued on technology assets this year, says Nigel Dawn, senior managing director and head of Evercore’s Private Capital Advisory Group, with more demand evident for “cash flowing industrial businesses, perhaps consumer or retail could be more attractive in this environment”.
Covid-recovery play
“We have seen something of a ‘Covid-recovery’ play in recent months,” says Jeff Hammer, global co-head of secondaries at Manulife Investment Management. “Sectors out of favour these past two years
– think restaurants, fitness, retailers, leisure – have shown up in recent GPLed transactions either demonstrating their financial resilience or seeking forgiveness for pandemic-induced distortions to their finances.” One adviser cites an unnamed secondary process coming to market in 2022 involving two US restaurant businesses that will command high demand but is quick to clarify that what GPs currently deem suitable for continuation is not necessarily tied to sector. “Trophy assets are ‘industrial strength’ businesses of enduring substance,” says Hammer. “They have proven management teams, diverse customer bases, multiple suppliers, and mature financials.” The assets that are being identified for continuation, and potentially coming into the secondary market in 2022 and 2023, must therefore have the potential for further growth organically and through M&A. This is demonstrated by GPs agreeing to re-invest 100% of carry proceeds into continuation vehicle transactions alongside secondary
Maturity of funds purchased in 2021 20%
15%
10%
5%
0 Less than 2-4 years 4-6 years 6-8 years 8-10 10-12 More 2 years old old old years old years old than 12 old years old
Source: Setter Capital Volume Report FY 2021
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Secondary private equity activity, by sector, in 2021 Financial Consumer Non-Cyclical Communications Technology Industrial Consumer Cyclical Utilities Energy 0
20
40
60
80
100
120
140 160 Deal Count
180
200
220
240
260
280
Source: Bloomberg Private Equity Database
buyers, resulting in strong alignment and suggesting that GPs believe in the go-forward return potential of these investments, says consultant Hamilton Lane. In some cases, GPs are going out of pocket to invest additional capital into the transaction, literally buying into the ‘support the winners’ thesis themselves, it adds. Infrastructure and venture capital funds are also increasingly looking at the space in 2022. Some of the largest continuations in recent years have been infrastructure assets, such as Global Infrastructure Partners’ 2019 Gatwick Airport secondary
sale. During the end of last year, Stonepeak raised around USD 3bn for a single-asset continuation of North American data centre platform Cologix, which it acquired in 2017 through a 2015 vintage infrastructure fund. Stafford Capital Partners has been an early investor in infrastructure secondaries, since 2012, and is nearing final close on a fourth fund with this strategy. Venture capital GPs are also seeing the appeal of continuation vehicles. At the end of last year, StepStone Group held an interim close on the largest reported venture capital secondaries
fund, raising over USD 2bn. In February German VC firm HV Capital launched a continuation fund of EUR 430m, with HarbourVest and LGT Capital Partners investing among others, to house all its existing investments from 2010-15. Speaking of the move, HV general partner David Kuczek was quoted as saying: “I haven’t sold many companies before because I believe the real value creation happens after many years.”
Getting burned
Scratching the traditional route for many tech-based VC firms – an IPO – he went on to say: “Startups are
getting burned by public markets. Look at Peloton, look at Delivery Hero. If you make one mistake, or don’t meet expectations, you have follow-on problems,” adding that public markets “aren’t for everyone”. Approximately 70% of transaction volume in the GP-led market last year involved companies that were six years or younger, with almost one-third of that involving companies that were three years or younger, according to Campbell Lutyens’ Secondary Market Overview 2022. The strongest interest is for younger funds of well-known top quartile large cap GPs coming out Made with
of their investment period, says Greenhill, as well as late-stage venture and growth funds but it also observed select appetite for tailend funds with near-term liquidity prospects. Neither trend is surprising, but with an increase in continuations more generally, particularly from mid-market and lower mid-market GPs testing the structure, some secondary funds and buyers may start to play the market differently. “It’s easier to underwrite a business that’s performed very well in the past and extrapolate that it will continue to perform well in the future – hence
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Targeted IRRs on secondary purchases Private equity funds
Venture capital
Infrastructure funds
ENERGY BOOST: OUTLOOK SHIFTS ON OIL & GAS
Real estate funds
LBO funds 0
5%
10%
15%
20%
IRR % Source: Setter Capital Volume Report FY 2021
the term ‘continuation fund’,” says Matthew Wesley, global head of GP advisory and global co-head of private capital advisory at Jefferies. “I think what will emerge in the future is a set of buyers who are not turnaround investors, per se, but investors who are able to dig a couple layers deeper and understand what a turnaround story could look like.” “Secondary assets could be marketed more as value creation opportunities - not just purely trophy assets, but solid businesses that need two or three more years for true value creation.” The secondary buyer universe will start to increasingly specialize over the next five years, he says: “there
will be a stratification”, rather than “everyone chasing the high-flying assets”.
Regional story
One example of this, offered by Larry Abraham-Ajayi, vp at Setter Capital, is Swiss-based Mill Reef, established in 2019, which focuses on GP-led secondary opportunities in technology and healthcare. Among the supply of GP-led opportunities, there is also a regional growth story to observe. North America dominates GP-led activity: sellers there continued to account for the largest proportion of deal volume last year, according to Greenhill, selling USD 103.63bn,
with Western European sellers representing USD 30.97bn and Asia Pacific sellers accounting for about USD 8.21bn. The figures offer a clue on where growth in GP-led activity could evolve next. Greenhill expects pan-Asian GPs and specifically GPs in Korea, Japan and Australia to emulate their North American and European peers to embrace the use of secondary market tools. “We also continue to be excited by opportunities in the venture and growth space in Southeast Asia and India, with a focus on technology and the rising consumer class,” it says.
While attitudes to the most popular tech companies in the public market came down to earth during the first months of 2022, in other parts of the private markets they may be moving in the opposite direction. In the energy sector, some GPs have been weighing up the value they have locked up in maturing oil and gas assets tied to LPs who no longer want exposure to carbonintensive sectors, say sources. Higher oil and gas prices and a supply crunch linked to Russian sanctions and a war in Ukraine may have also improved the valuation outlook for some of these assets, in the short term at least. Secondary funds and
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sources disagree on how much demand exists in the secondary market for these assets, however. “One sector that does not work for continuation vehicles, or it doesn’t work in the secondary market period, is energy and oil and gas,” says a London-based placement agent. “Many secondary funds have very strict ESG criteria.” Some secondary funds may sidestep this by providing their LPs with a strong decarbonisation story. Others may have a less concerned LP base. Either way, GPs are likely to be at the mercy of a limited group of potential buyers and the risk of deep discounts, says the placement agent.
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R E G U LAT ION
FRUSTRATED LPS AWAIT NEW GUIDANCE ON GP-LED SECONDARIES
The Institutional Limited Partners Association (ILPA) is looking to assuage LP frustrations through a guidance report, with proposed SEC regulations in the background, as the relationship between some GPs and their LPs grows increasingly strained
A
mong a proportion of LPs, frustration has been building alongside the rapid growth of GP-led secondaries over the past few years. “Certain LPs have small teams who aren’t necessarily experts in GP-led secondaries and who are currently under a lot of pressure with primary fundraising. They’re sometimes finding themselves almost ambushed by these transactions which may come with little warning or time for decision-making,” says Macfarlanes partner Alex Green. These LPs can include smaller family offices, high-net-worth funds, fund-offunds, corporate pension plans, as well as sprawling US state pension plans which manage significant amounts of capital but have small teams. Regulation bodies, including the US-based Institutional Limited Partners Association (ILPA), which serves over 450 member institutions representing over USD2 trillion in private equity AuM,
and US market regulator the SEC, are now looking to push for clearer guidance to keep LPs’ alignment of interest with GPs, and are drafting rules which should be finalised within the year. The SEC’s proposed regulation is currently undergoing a 60-day period of public comment which started in early February. During second half of 2022, ILPA guidance will map out what an ideal secondary transaction process between an LP and GP should look like, with the aim of protecting LPs from potentially unfair terms, time pressures and excessive fees.
Time pressure
As the secondaries market transitions from a liquidity and exit solution to a continually growing market, LPs are requesting that guardrails be put in place to ensure their protection in these transactions, according to ILPA
standards and best practice director, Neal Prunier. “The frustrations are multiple, the main ones being timing issues, with certain LPs being given as few as ten business days to carry out the underwriting process, and the terms/ fees to participate in the continuation fund are unattractive. At a macro level, some GPs are also doing this without having written it into LPAs (Limited Partnership Agreement); they don’t have explicit permission to do it. Finally, transparency and having access to the necessary information are also current big concerns,” says Prunier. Certain GPs have even gone as far as to complicate the language in the LPAs so that they have the right to do continuation funds without approval from the LPAC (Limited Partner Advisory Committees), adds Prunier. “We have evidence of assets being included [in a GP-led transaction] where that particular portfolio company
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R E G U LAT ION
GP-leds now dominate the secondaries landscape 140 120
USD bn
100 80 60 40 20 0 2015
2016
2017
2018 LP-led
2019
2020
2021
GP-led
Source: Jefferies
is in pre-IPO discussions and it hasn’t been openly disclosed to the investor. We’re also seeing incidences where assets are being carved out and placed into continuation funds prior to year four of the fund, rather than year eight or nine; some GPs are looking to get additional carry and higher fees at the expense of LPs,” he adds. ILPA is proposing several solutions, including extending the timeframe for the LPAC and for LPs to decide on whether to roll or exit. The association doesn’t have a definite number of days as of yet, but they’re looking for it to be greater than the ten business days some LPs have experienced. They are also requesting more transparent and specific information to assist LPs in their decision-making. There will also be encouragement of a ‘status quo option’, but if this option is not provided, it will need to
be explicitly disclosed to the LP with a rationale as to why. The association plans to solicit GP, legal, secondary advisors’ and valuation firms’ feedback on this guidance before publishing later this year, in order to increase the chances of the advice being well-received and adopted by the industry.
Transparency
In addition to these reasons “there are several LPs that, by default, are not able to participate at all. If their board meets every month and the request comes to them with only ten days to complete it, they can’t participate,” says Prunier. He adds that there isn’t always transparency and that certain LPs are not willing to enter a process because of fees and expenses being higher than they were originally paying, or the fact
that they’re not able to increase their investment. Those LPs who are willing and comfortable carrying out the due diligence can often run into challenges since carrying out due diligence on a particular asset is a different skill set to running due diligence on a fund. The reasons above have, at times, contributed to as many as 80 per cent of LPs not rolling, according to Prunier. The SEC is also proposing new terms, on valuations rather than timing, where “fairness opinion” will be required to ensure valuation arrangements are reasonable and fair on LPs. It has been reported that this requirement is already being challenged by some GPs, with the argument that certain arrangements may not require this clause. But according to advisers and investors, the timing on GP-led Made with
We need GPs to significantly increase rationale and transparency, so we’re specifying preferred behaviour
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R E G U LAT ION
2020
2019
2018
2017
2016
2015
Value of continuation funds, by year
0
20USD
40USD
60USD
80USD
100USD
Source: Pitchbook
secondaries is the real concern for LPs so the SEC rules may have little impact on current frustrations. As with ILPA, the SEC rules are still being approved, but it’s currently thought that they will “create a little more friction, a little more cost, and a little more timeframe [for GPs],” says one adviser. They may still force GPs to involve more third parties in their secondary transactions, to interrogate the GP process and thus put pressure on GPs to provide fair terms. So, what will the future look like for LPs in a growing secondary market? Although not commonplace in all secondary transactions, Prunier says
some of the abovementioned concerns are leading to a relationship strain between certain LPs and their GPs, which could have a knock-on effect on the industry. In the past two years, LPs have increasingly experienced fundraising and capital commitments at an unprecedented rate, leading to a “frenzied fundraising pace” and GP-led secondaries only exacerbating the existing frustrations and challenges. For private wealth investors using feeder funds, the GP-led secondary market is also opening up. “It is a more recent consideration for smaller investors,” says Alex Bozoglou at Titanbay, “so the onus is on companies like us and the sponsor community to help
with education around the risks and opportunities available in this market”. His colleague and Titanbay’s chief commercial officer Adam Harrison adds: “It’s absolutely important that the industry takes stewardship of these issues and enforces some policies and procedures. I think the regulator is stepping up to that. The number of complaints that have come from LPs has shone a light on it, and that now needs to be resolved, and I’ve got faith that it will be. Ultimately, the GPs have to be aligned with the LPs.”
Forego liquidity
“We don’t think these transactions are going to stop; we don’t even think
that they’re going to slow down. We’re trying to provide guidance to avoid problematic incidences which LPs have experienced in the past,” says Prunier. It is true that many LPs will continue to seek liquidity instead of rolling into a GP-led secondary process, but increasingly “LPs will forego liquidity if there’s a chance for higher performance and better returns in the future,” according to Prunier. If an LP’s priorities and position in a continuation vehicle transaction, and indeed a growing GP-led secondary market, can be better safeguarded, this choice will become a more important consideration. Made with
Coller Capital’s latest Global Private Equity Barometer reports that 56 per cent of LPs are looking to change their business practices and improve their decision-making and expertise to make themselves more attractive to GPs for co-investments. One solution lies in more guidance for GPs, and for LPs to also adjust their expectations. “We need GPs to significantly increase rationale and transparency, so we’re specifying preferred behaviour and interaction in support of this strong alignment of interest between LPs and GPs, which seeks to prevent some of the worst GP behaviour in GP-led secondaries,” says Prunier.
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VA LU AT ION
SECONDARY PRICING IS DECOUPLING FROM
N AVs
With a time-lag on public market volatility, a fund’s NAV may not portray the fair value of secondary assets in the current market, so valuation methods are evolving in other ways
T
he private equity secondary market known today was born in a world of discounts, driven by unloved assets largely unable to find a home through more traditional exit routes. In recent years, premium pricing has become more common as trophy assets have been rehoused in continuation vehicles. “We had one buyer last year tell us that they weren’t participating [in a GP-led transaction] because the price was too good, this is a real consideration,” says Sunaina Sinha Haldea at Raymond James. Private equity secondaries have traditionally priced between a discount or a premium to net
asset value (NAV) within an average range of 90 to 105, where 100 is par. Given that NAVs are typically updated quarterly, this method of secondary pricing usually lags movements in the public market by a number of months. In the current market this means portfolios pegged to valuations from September 30 would not have taken account of the tech sell-off in January or the war in Ukraine. End of December values, usually set in April, may be equally unhelpful for guidance on the fair value of secondary assets, say sources. “It’s hard to have strong conviction when there
is so much volatility,” says Nigel Dawn, senior managing director and head of Evercore’s Private Capital Advisory Group.
Valuation concern
Average secondary pricing as of the fourth quarter 2021 came in around 97% of NAV, according to Jefferies’ full-year volume report for the market. Looking ahead at 2022, only one in five respondents to a survey by Private Equity Wire in March believe that the pricing of secondary assets coming to market would see a premium to NAV. The vast majority expected pricing to below
par or at par. Around 70% said they would have concerns about valuation of these assets in the current market. According to Setter Capital, average NAV valuations will increase 3.4% in FY 2022. This is less optimistic than in 2020, when buyers expected NAVs to increase by 5.1% in 2021. For secondary investors attempting to read through the uncertainty caused by Russia’s invasion of Ukraine, inflationary fears and resulting stock market volatility, there are two places to look for guidance. The first lies in two recent, but very different shocks: the Brexit vote in 2016; and the Covid-19
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VA LU AT ION
Do you have concerns about the valuation of secondary assets in the current market?
[Current volatility] will not shut down the GP-led market as Covid did, but will lead to a rebalancing of sponsors and companies [involved]
outbreak in Europe four years later. During the latter, the GP-led market paused globally for around four months while market participants went back to their drawing boards to figure out what would work. They adjusted quickly and landed on healthcare and technology as the most resilient sectors. The Russian invasion has not had the same impact on the GP-led market, but it still might. “My current view is that Brexit, the invasion, inflationary pressures will not shut down the GP-led market as Covid did but will rather lead to a rebalancing of the types of sponsors and companies that access this part of the secondary market,” says Jeff Hammer, global co-head of secondaries at Manulife. “The GP-led pipeline will likely see a different mix of opportunities - more US sponsors than European sponsors, more situations away the political risk of sanctions, more companies from ‘resurgent’ sectors such as defense, oil and gas. I believe we are seeing this shift already.”
“There’s a certain degree of correlation between public and private market pricing,” says Valérie Handal at HarbourVest, “but so far market volatility has been inter-quarter so too early to tell what the effect on pricing will be. However, we haven’t seen that translate into a slowdown in activity in the market. We’re still having conversations with sellers, GPs, agents, and other players in the market, and deal flow remains strong.”
Today’s value
According to chief commercial officer at Titanbay Adam Harrison: “What we’re faced with now is a geopolitical crisis which will exhibit the same characteristics on valuations [as the pandemic] and create the same problems and uncertainties for material positions in portfolios.” A second guide to GP-led pricing in 2022 can be found in how buyers are sidestepping a fund’s NAV to form their own valuation of underlying assets, supported by the increasing number of advisers entering the market and relationships secondary
buyers have with sell-side GPs. “As the buyer universe evolves,” says Matthew Wesley at Jefferies, “buyers have really adjusted themselves to be more bottom-up investors and they have found ways to get increasing conviction on assets independent of NAV. We have run processes where we haven’t even shown the book value to investors and got pricing purely independent of what book value is. I think it’s just more reflective of how this marketplace is becoming more like traditional M&A.” Such an approach can prove effective on single assets, particularly where a dual-track M&A process can prove fair value to existing LPs in the fund. “A lot of the pricing isn’t NAV focused at all, it’s really marketbased,” says Immanuel Rubin, head of European secondaries at Campbell Lutyens. “The reality in GP-led [trades] is that you really have to evaluate the asset as it is today. Transactions often trade at significant premiums in line with what you would see if they were to do an M&A. If you think about the
No 30%
Yes 70%
In relation to net asset value, would you expect pricing for secondary assets to be: Made with
Premium to par
At par
Below par
0
10%
20%
30%
40%
Source: Private Equity Wire GP survey, March 2022
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VA LU AT ION
THE PRICE IS RIGHT: HOW NAVS MOVED IN 2021 The democratisation of private equity investing has been well signposted but the associated increase in transparency is yet to reach the secondary market in the same way. Some opaqueness is needed on price discovery in the GPled secondary market, says a buy-side source. With this in mind, it is the secondary buyers and advisers that can price assets quickly and efficiently that will have often an upper hand. For others, recent movements on average NAVs offer some guidance. According to Greenhill, strong overall and portfolio company-level economic performance in the US and Europe during 2021, combined with buoyant stock markets in the first two and last quarters, translated into very robust increases in 1Q, 2Q and likely 4Q NAVs. “This positive backdrop acted as a catalyst for an increase in deal flow from LPs and GPs alike, which was matched by buyers’ willingness to aggressively deploy capital considering
shorter fund-raising investment cycles,” says the investment bank. Average secondary pricing for buyout funds increased by 8% to 97% in 2021, compared to 2020. There was a strong increase from 92% in 1H 2021 to 104% of NAV in 2H 2021 driven by the supply of newer vintage funds managed by high quality GPs, and funds with exposure to COVID-proof sectors such as healthcare, tech-enabled businesses, and consumer staples. Pricing for tail-end funds has also recovered within reach of preCOVID-19 levels albeit buyer selectivity remains high. Secondary pricing for venture and growth funds however saw a 6% drop to 79% in 2021 from 85% of NAV in 2020, impacted by a resurgence of tail-end fund volume and buyer caution with regards to valuations in the technology sector. Demand continued to be strong for funds with exposure to late-stage tech, digital infrastructure, and healthcare assets, says Greenhill.
Line in the sand
[secondary] market, it has to stack up with what the market would pay on a direct sale”. While an M&A valuation – looking at multiples of earnings, for example – may work for large single asset continuations, a multi-asset secondary trade may still look more to the underlying fund NAV. “I’ve been in this business a long time, and I think you’re never going to move fully away from the NAV – it’s the line in the sand, it’s where the discussion starts,” says Pilson at Triago.
The move away from NAV-based pricing on single assets in the GP-led secondary market may also have another effect, though. “Most NAVs aren’t super aggressive,” says the unamed advisory source, “so in some ways, you’re negotiating against yourself or your clients.” As with private equity exit multiples in parts of the M&A market, it is very possible that pricing for secondary assets could follow a similar ascent, despite the current uncertainty.
According to another unnamed adviser: “I think [not using the NAV] is becoming more prevalent as the determination on a case-by-case basis that the NAV is not really representative of fair market value. It’s representative of some kind of value, but it’s not fair market. And in this particular circumstance, we identified early on that NAV was not an appropriate indicator of value so we decided to use a valuation methodology as we would in the M&A market.”
Historical secondary pricing (% of NAV) 100 98 96 94 92 90 88 86 84 82 80 78 76 74 2013
2014 Buyout
Source: Greenhill
2015
2016
Venture & Growth
2017
2018
Fund of Funds/Secondaries
2019
2020
2021
Infra/Energy Made with
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A D VIS OR S
T H E ‘ F LY WH E E L’ SPINNERS Investment bank and boutique advisory firms are moving into the GP-led segment to drive deals forward. Three leading figures explain how the market is changing as a result
P
rivate equity GPs are not the only ones watching the secondary market more closely since the pandemic. A slew of new M&A advisory units has been launched or established and they have been busy hiring some of the most experienced names in the business. Last year a team of 15 moved from Greenhill to Jeffries, Rothschild has made hires from PJT Park Hill in London and other big names including Goldman Sachs and Guggenheim Securities have poached talent from Lazard and elsewhere.
Secondary transactions are certainly more GP-led than they used to be, but many of these GPs are being increasingly drawn into the market by their advisers, who can gauge valuations and sell-side interest against a more traditional M&A process. “The substantial increase in the number of secondary advisory practices and their headcount is serving to build a much larger institutional flywheel that will drive increased GPled transaction activity in the years to come,” says Jeff Hammer at Manulife. Around USD 115bn worth of deals
were intermediated in 2021 – an increase of 181.5% on 2020, according to Setter Capital. Evercore currently dominates the space with more than half market share but others, including the names mentioned above, are positioning themselves to capture a growing chunk of the dealflow that is still to come from GPs feeling their way around the market. Private Equity Wire spoke to three of the most well-known advisory names for their perspective on the next phase of growth in the GP-led market.
NIGEL DAWN, GLOBAL
GP-led secondaries are by their nature conflict transactions for the GP, where the GP is on both sides of the transaction. More than ever, you need an intermediary to make sure the transaction is fair for all parties (GP and LP) and that price and terms discovery are carried out efficiently. Having more intermediaries in the secondary market is a good thing, because it fosters innovation and choice, and is also a validation of the market. If the intermediary has a strong M&A franchise, where the sector bankers are talking to the deal partners within private equity firms on a daily basis, then it provides for better knowledge of the assets and so better execution. And if the intermediary is selling or buying companies for the sponsor, trust has already been established between the GP and the adviser. Intermediaries
who do not have an M&A business are materially disadvantaged in this market. We had 55% of the market volume for GP-driven transactions in 2021, and probably about 60% of the capital we raised came from non-lead investors (smaller secondary funds and institutional investors). That’s quite a big change actually, and it’s a sign of the capital available for the more traditional secondary investors. This capital also turns the classic, secondary, single asset transaction into more of a fundraising process, because the lead investors tend to set the price and the terms, and then those elements are used to syndicate the transactions. Continuation is more likely to be the preferred exit route for a GP who is committed to retaining a company for the longer term and needs to raise additional growth capital.
HEAD OF PRIVATE CAPITAL ADVISORY, EVERCORE
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A D VIS OR S
MAT THEW WESLEY, GLOBAL HEAD OF GP -LED ADVISORY, JEFFERIES
BERNHARD ENGELIEN, HEAD OF EUROPEAN SECONDARY CAPITAL ADVISORY, GREENHILL & CO
We approach this market very much from an M&A mindset. As we’re integrated within the broader Jefferies investment bank, anytime we’re doing a single asset secondary transaction, we’re working with our industry experts to position the business to tell the equity story and show our buyer universe the comparables that they should be looking at to guide them. I think that really helps us push value. Our bankers are pitching strategic alternatives to a sponsor so oftentimes we are being asked to weigh in ourselves as to whether a secondary market exit would make sense for that particular asset or not. There are times where we are
more proactive alongside our fellow bankers, but I don’t think the market has gotten to the place where we are singling out assets or companies for a pure secondary opportunity and approaching GPs. [Knowing] the entire network of buyers helps you understand and stay current in the market, you understand how to navigate issues within a sponsor, you understand how to navigate issues between a sponsor and a management company as it relates to the specific transactions. And, on top of all that, you understand LPs’ perceptions of these transactions: how certain elements of the transaction would be viewed
positively or negatively. Plenty of banks want to get into this business from the advisory side, but there’s very few that can claim a set of credentials and a track record of getting these larger deals done. There’s very few who have been doing this for a long time I think our integration within the investment bank has really changed the secondary advisory business. You can try to repurpose a sponsor banker, or an M&A banker, but they’re not going to be able to sit there and talk about the nuanced issues that they’ve run into over the last 10 years working on these transactions and how they’ve navigated them.
If you look back 10 years ago, the majority of GPs were sceptical of GP-led transactions. The view was that these transactions were primarily for distressed GPs or zombie funds. Advisers had to do a lot of education work to convince high quality GPs of the merits of such transactions provided the motivations are the right ones – for example more time and potentially follow-on capital to maximise value, opportunity to continue to manage the crown jewels in the portfolio and take them to the next level. The adviser has an important role to play in helping the GP understand whether a transaction makes sense for
all stakeholders and is feasible. In the current market, private capital advisory teams increasingly work closely with their M&A sector and sponsor coverage teams to deliver holistic solutions to GPs. We also observe increased specialisation between teams working on GP-led and LP-led transactions. At Greenhill, we have adopted a more holistic model whereby some senior team members focus more on GP-leds but continue to have exposure to the LP market in order to provide the best advice to their clients. Our mid-level and junior professionals work on all type of transactions in order to develop broad based transaction experience.
Where do we see the growth in GPleds? At the moment, the vast majority of GP-led transactions occur in the large and mid-cap buyout space. There is ample room for growth in the venture, private credit and real asset space. I would not be surprised to see more specialised advisers enter the fray in the future. The mid and small cap market is also currently underserved from an advisory point of view. We actively leverage existing dialogues of our primary placement colleagues and the relationships we have built through regular LP fund transfers to develop this segment of the market.
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T E C H N OLOG Y
ARE GP-LED TRANSACTIONS OPEN TO DISRUPTION?
Secondary markets are known for opaque pricing and close networks. Is the advance of data and technology about to change all that in private equity’s growing GP-led space?
R
ecently established fintech platforms are broadening access to illiquid private equity funds and in some cases building digital secondary markets where high-net-worth investors can find potential buyers long before underlying funds would liquidate. Service providers, such as Nasdaq who are currently providing a platform called Nasdaq Fund Secondaries which provides GPs with a centralised model to faciliate their transactions for investors, are
changing the secondary space in an effort to streamline transactions between GPs and LPs. Alex Bozoglou at fund platform Titanbay describes his company’s approach as a “hybrid model combining institutional liquidity with broader investor participation providing faster transaction speed and appropriate market pricing across a wide range of ticket sizes”. Neuberger Berman and Blackrock are two examples of large private equity firms that have partnered or
invested in such fintech companies to access or better understand their growing investor client base. But while technology has taken certain parts of the private markets by storm, traditional GP-led secondary transactions are still known for relying more on inperson relationships, with data and analytics supporting rather than leading the deal-making process and opportunities for technology-based platforms to disrupt origination and valuation appear less obvious.
“People are succeeding by having relationships, more formal coverage and having a track record of getting deals done,” says one investment bank adviser. These relationships remain at the core of GP-led transactions as they have done for years. “Going back to the early 2000s, there were discussions around technology platforms becoming a part of the secondary markets, and it’s gone through various iterations since then. However, I don’t think
it’s really taken hold because this continues to be a relationshipsdriven business,” says an investment adviser in this space. The same person doubts that much will change with regards to how technology is used in the market, notably because GPs will always want control over the information. Currently, the more well-known buy-side and digital technologies such as Preqin and Pitchbook are helping support investors, but other,
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T E C H N OLOG Y
Continuation funds will create a more robust information set for GPs that could be aggregrated fairly easily and that’s where the impact will be
more nascent technology “isn’t really moving the dial”, according to law firm Goodwin. For many on the buy-side, particularly when it comes to price discovery and valuation, working in an opaque market without openaccess data points offers a potential competitive advantage. “Private markets are private by nature,” says HarbourVest managing director Jeffrey Keay. “Fund level and particularly company level information that goes into pricing secondary opportunities falls under strict confidentiality restrictions, as GPs want to ensure that sensitive data related to their portfolio companies and LPs is protected.” How such information is shared among GPs and their LPs would be key to any technology or analytics platform being successful in the market. “GPs also want a say with respect to which organisations acquire interests in their funds, just like they do when they initially raise a new fund. These characteristics will likely slow the widespread adoption of
tech-enabled secondary trading platforms in the near to medium term,” notes Keay. All this is not to say that advisers in the GP-led secondaries space don’t see a potential for growth and evolution. “Tech and data are going to be huge drivers of how different players across the secondary market will achieve success,” says Keay, “especially in terms of your ability to take advantage of the data different players have in-house to evaluate opportunities.”
Leveraging data
The GP-led secondary market is characterised by a relatively small set of lead buyers and secondary funds, many of which have decades worth of pricing and sector experience. But in a fast-moving and volatile market, can historic information of fund maturity, asset prices or GPs be better used to build a platform to support origination and valuation? “It’s at the top of everyone’s mind; how can we best leverage technology to make better decisions? We put
a lot of emphasis on technology to capitalise on the wealth of information that we have from portfolio companies. This information, in turn, allows us to enhance our investment decision-making. That said, success comes from spotting the underlying value, which will continue to be driven primarily by human investment judgement,” says AlpInvest secondary investments partner Neal Costello. One example is New York-based service provider Chronograph which has stepped up in data accumulation, providing a platform which claims to synthesise and configure it into a more useful format. Many GPs are looking to centralise their data to make the best decisions and predictions, such as knowing when an asset or assets are ripe for a continuation fund. “If you can mobilise and organise your data in certain ways, I think [such a] platform gives you an advantage over a larger, more aggressive fund,” says a leading buyside investor in the GP-led market. “We don’t have the same culture, but we should have an information advantage if we play that
to our advantage in this sector.” Current challenges lie in data gaps, data sharing and sensitivity and a lack of normalised data to develop machine learning. It’s clear that tech has not yet fully penetrated the GP-led secondaries space, but with assets remaining in the hands of GPs for longer, there will be increasingly more data to leverage, for whatever purpose. “These continuation funds are going to create a more robust information set out there amongst GPs, because of these longer holding periods,” says Nash Waterman at Morgan Stanley Investment Management. “With regard to their investments, and I think, to set their systems that are collecting this data, it will create more robust information across the market over time that could be aggregated fairly easily and that’s where the impact will be.” As the GP-led secondary market grows and evolves, the current generation of private equity fintech platforms and service providers will be waiting for this moment, and the impact that will follow.
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IN T E RVIE W S
P R I VAT E E Q U I T Y W I R E
CONTRIBUTORS: Colin Leopold Head of Research & Insight colin.leopold@globalfundmedia.com Fiona McNally Reporter fiona.mcnally@globalfundmedia.com Scott Newman Art Director scott.newman@globalfundmedia.com FOR SPONSORSHIP & COMMERCIAL ENQUIRIES: Jo Cole Commercial Director jo.cole@globalfundmedia.com
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