Bullish sentiment remains for secondaries amid macro uncertainties

The secondaries market will boom in 2024 as liquidity concerns persist and LPs look to invest in new asset classes, a panel at PEI's Women in Private Markets Summit has heard.

Secondaries market participants believe the strategy will continue to yield attractive returns amid ongoing macroeconomic challenges.

The subsector is expected to provide a strong return profile next year and should serve as a gateway to asset classes that are new to some investors, according to a panel discussion at PEI’s Women in Private Markets Summit: London 2023 last month.

“Whenever there is a macro type of situation, we see the secondaries market really pick up and then we see the growth spurt afterwards,” Wandy Hoh, head of infrastructure secondaries at Macquarie Group, said during the event. In the past 18 months, the macro environment has led investors to consider secondaries as a means to manage portfolios and enhance liquidity as well as to invest in it as an asset class, she added.

The lack of a J-curve in secondaries is especially appealing for investors considering a different asset class, according to Hoh. “Using secondaries is a great to start your programme,” she said. “You’re going to have access to a much more diversified portfolio in a much shorter time.”

According to affiliate title Private Equity International’s LP Perspectives 2024 Study, published this month, a majority (59 percent) of LPs plan to commit capital to private equity secondaries funds over the next year – the largest share of investors that have said they will do so across a six-year period.

Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said she was bullish about deal activities in the secondaries market next year. According to Campbell Lutyens’ H1 2023 Secondary Market Overview, transaction volume in the secondaries market is expected to reach $110 billion this year, up from $106 billion last year. Haldea anticipated the transaction volume to hit the range of between $140 billion and $160 billion in 2024.

“The average institutional LP is starved for liquidity because the distributions that they’re used to getting from their private equity portfolios have dried up,” Haldea said. “At the same time, they keep having to fund capital calls and contributions into their funds. So, many of them are seeking liquidity in the secondary market.”

GP-led secondaries will also present great investment opportunities, especially in real estate, according to Anne Gales, co-founder of London-based placement agent Threadmark. “Real estate investors generally don’t like to sell at a discount,” she said. “The much bigger opportunity is [in] GP-leds… [That’s where] you have a bit more control and structure a very interesting deal.”

Manager selection will play a more important role in the secondaries market, according to a few investors on the panel. “This is a time when the differentiator is going to be about picking the winners and being able to identify losers when you’re buying portfolios,” Hoh said. “Because in a probably shorter time than you can imagine, [picking losing managers] will come to burn you.”

Gales agreed: “This is not a market where you just want to sprinkle capital and get to people in desperation of capital,” she said. “This is an opportunity for secondary investors to partner with managers… with the very best assets.”