Secondaries Preview: Strong LP stakes dealflow, strategy specialisation to come in 2023

Harriet Matthews
28 September 2022

Tweet
Facebook
LinkedIn
Google plus
Send to

Secondaries market players are expecting to see increased opportunities in LP stakes alongside a cooling off of GP-led deals in 2023, accompanied by an uptick in secondaries investors launching new strategies, attendees at IPEM in Cannes told Unquote.

Increased dealflow in the LP stakes portion of the market is expected to materialise in response to the primary fundraising market, where LPs are struggling to keep up with the number of re-ups required of them alongside a fall in primary distributions.

Many potential buyers and sellers will be waiting on June 2022 valuations to act, meaning that increased dealflow in this area will push through to 2023, one asset manager told Unquote.

While LP stake acquisitions can address liquidity problems related to primary fundraising, secondaries fundraising itself is one area unlikely to be seriously affected by changes in LP preferences and risk appetite. One secondaries adviser told Unquote that several LPs have in fact expressed their preference for secondaries in the current market, given the inherent diversification of the strategy and its strong returns.

Although 2022 has seen less capital raised to date than 2021, secondaries vehicles have continued to make up a consistent portion of this total. According to Unquote Data, secondaries GPs operating in Europe raised EUR 30.4bn across 16 vehicles in 2021, making up 13% of capital raised that year, versus a further EUR 16.8bn raised to date across 11 vehicles in 2022, accounting for 11% of the market by aggregate value.

Single-asset overexposure?
GP-led secondaries deals have been dominating headlines as the market embraces continuation vehicles as a way to prolong the lifespan of an investment while delivering returns for LPs. Several market reports on 2021 found that GP-led dealflow made up around half of the activity in the global secondaries market in 2021, versus a third of activity typically being comprised of GP-leds.

However, this flurry of activity is not expected to continue, one secondaries GP told Unquote.

The same secondaries adviser told Unquote that H2 2022 has seen a slightly slower and more selective market. Many secondaries GPs have found themselves overallocated to single-asset deals due to their activity in 2021, two sources told Unquote. Many of these deals are seeing a repricing, leading to a high bid-ask spread as supply is currently outweighing demand, they told Unquote.

However, they added that there is still demand for the best single-asset deals. Secondaries investors are sympathetic to the logic that it is not the right time to sell certain businesses, they said, noting that this is often down to the market rather than the business model, which can be thoroughly analysed during the diligence.

Standing out from the crowd
Many secondaries GPs are currently on the road or gearing up for new vintages of existing strategies, including Glendower Capital, Ardian, ODDO BHF and Capital Dynamics, according to Unquote Data.

However, with the market thriving and competition increasing, secondaries investors are looking for ways to differentiate their offering as the market matures, with strategy specialisation expected to be the next step.

Specialisation makes sense as a next logical step in the development of the market. The secondaries market is younger than the overall PE market, one source pointed out. In addition, this market has undergone a faster rise in profile and change in perception than PE as a whole, particularly on the GP-led secondaries side.

Several market players are expected to develop funds investing solely in GP-led deals. Players already active in this market include ICG and Pantheon. However, one source told Unquote that established private equity GPs could also look to raise such funds as an extension to existing strategies, albeit that they will need to build up or buy in-house expertise in this area.

Two sources who spoke to Unquote said that some secondaries payers are intending to launch strategies focusing solely on venture capital secondaries. While valuing GP-led VC deals has its challenges and risks, being ahead of the curve could yield strong opportunities for those early enough to take advantage of them.