Secondaries set for bumper year as dry powder overhang remains

The market is gearing up for a flurry of secondaries investing in 2021 with an estimated $61bn deployment target, according to a recent report published by secondaries advisory firm Cebile Capital. Despite the expectation of intensified activity in the second half of 2020, large amounts of dry powder earmarked for deployment remained unallocated, resulting in unmet investment targets. 

As of November 2020, there was still an estimated $18bn's worth of 2020 capital earmarked for secondaries outstanding, according to the report. Total transacted volume was expected to come in at around $39bn once full year numbers are out – roughly half of the transacted volume recorded in 2019. Most of the dry powder is concentrated among the largest players; investors with $1bn or more of available capital represent just 11% of buyers by total of number of investors but represent 61% of the capital pool, according to the Cebile report.

"Looking back to last year, everything froze in the second quarter," says Sunaina Sinha, managing partner at Cebile Capital, "so the market lost a whole quarter of deployment, which investors will want to make up for in 2021.

"And, despite the market being back by June, the dynamic in the market was that investors were cautious, especially in pricing secondary positions. Public markets were up and therefore GP valuations went higher from the end of Q2 and even higher into Q3, so LPs sat on the sidelines as no-one wanted to sell at a deep discount with high NAVs. There were no forced sellers in the LP community." 

But LPs cannot sit on the sidelines forever; activity picked up towards the end of 2020 and will continue into this year, Sinha says. A return to 'normal' is between nine months and a year away, according to over half those surveyed by Cebile; while one in three respondents believe that normality is three to six months away only.

GP-led deals continue to dominate
According to Cebile, three key trends will stand out for the first half of 2021: GP-led secondaries will continue to dominate and make up roughly one third of transactions; single-asset deals will be the highest growth area; and LP portfolio deals will start to come back in the second quarter after being on hold for much of 2020.

The market will not be surprised by the ever-increasing presence of GP-led deals, with roughly $25bn in dry powder earmarked for this strategy alone in 2021. Within the category, continuation vehicles remain popular as they enable buyers to perform in-depth analysis of the underlying assets and provide managers with additional time to maximise value, Cebile noted in its report. Over two-thirds of buyers expect continuation vehicles to be their most favoured GP-led deal structure in 2021. 

Cebile's survey respondents – comprising 95% of active secondaries investors, according to the firm – expect demand to be strong, with buyers likely to continue investing in sectors that are their core focus and placing increased importance on the asset managers themselves. More than 90% of buyers questioned expect to prioritise underlying sectors less impacted by the Covid-19 pandemic, such as business services, IT, TMT and healthcare.

"During uncertain times, you go back to your bread and butter", says Sinha. "Tech and healthcare were already a sectorial shift and we'll continue to see a flight to quality and safety for LPs in terms of sector and managers that they already know."

Indeed, investors' desire to deploy significantly more capital in 2021 than they did during 2020 will not result in less scrutiny when underwriting deals and deciding which deals to invest in. On the contrary, the majority of respondents report that they will be increasingly selective in the year ahead.

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