In recent months we’ve reported on the increasing competition in the secondaries sellside advisory market. At least three firms have entered the fray this year, including US giant Guggenheim Securities and Swiss interdealer-broker Tradition. The latest is New York-headquartered Jefferies, which has hired at least two managing directors from Greenhill, as we reported last week.
The GP-led secondaries market has attracted much attention so far due to its impressive growth – this subsector accounted for almost 40 percent of total deal volume in 2019, according to estimates from UBS, while data from Greenhill show GPs overtook pensions and sovereign wealth funds as the market’s biggest sellers in 2018.
While deal volume for GP-leds plummeted in the first half of the year amid the pandemic – just $6 billion of deals closed, according to Greenhill – expectations are that this part of the market will bounce back, in large part due to GPs wanting time to hold onto assets given the coronavirus crisis.
The market is about to get a lot more crowded with the entrance of the firms we’ve noted above, but the real disruption could be just around the corner. As GP-led secondaries processes start to require a lot more M&A expertise, more of Wall Street’s investment banks such as Goldman Sachs, Morgan Stanley and JPMorgan are bound to sit up and notice they’re missing out on a slice of a growing pie. Secondaries Investor is already hearing that at least two big global IBs have eagle eyes on the market.
Nowhere is this more true than in the single-asset market, as sponsors grapple with exit horizons that have been pushed out due to the pandemic. As opportunities around sole-asset opportunities increase, so does the need for deeper, more thorough analysis and information – something top tier investment banks are in prime place to provide.
Yet, investment banks thinking of banging down the gate face a slew of challenges. GP-leds involve a different set of dynamics than simply selling an asset to a buyer; they’re nuanced processes in which the buyer is the seller, and ones that require in-depth understanding of alignment, LP-GP relationships and future fundraising – the last of which many investment banks do not have expertise in if they don’t have placement agent businesses.
M&A processes aside, most banks are not experts in the institutional LP market and the GP-LP dynamic, and thus lack data and knowledge on essential areas such as LPACs, LP behaviour and fund terms, says Thomas Liaudet, a partner at Campbell Lutyens. “How do you build it? How long does it take you? Do I, as the head of an investment bank, want to try and build a new business in this niche area or is it lower risk to invest in hiring more tech growth bankers?”
Still, as the GP-led market grows, it is inevitable that more traditional M&A bankers will be eyeing how they can get in on the action, as the likes of Citi has done. For the incumbents, having a track record of running high quality, transparent processes and being known for identifying and managing potential conflicts of interest will stand them in better stead to thrive in this part of the market’s next stage of evolution.
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