Buyers look to GP-led leverage amid rising competition, says Investec

Growing competition in the GP-led secondaries market is causing more buyers to consider using leverage, according to a report by Investec.

The lender saw a “significant uptick” in financing requests for GP-led deals in the third and fourth quarter of last year in light of continuing low interest rates and increased competition for deals, according to its annual secondaries survey.

“We’ve had half a dozen secondary funds always using some sort of financing solution for continuation vehicles,” said Investec’s head of secondaries Ian Wiese. “What we’ve seen in the last couple of months is that a lot of the players that have never used more deal-based solutions are happy to explore and implement those deals.”

This includes a number of large buyers who have long proved resistant to employing leverage, Wiese said.

“It could be a form of acquisition finance, finance to bridge to an exit, it could be because there are debt positions in that continuation vehicle and it doesn’t make sense to draw on equity because your debt return is capped.”

Only three secondaries managers surveyed described themselves as not involved in preferred equity investing and all three said they would become active in the next 12 months. Investec has seen an increase in enquiries about using back-leverage to boost the returns of these deals and bring them more in line with a typical secondaries deal.

“[In 2020] there were large liquidity solutions being sought by primary managers. Secondary managers were bidding for them but often getting outbid because of the pricing and returns that some of the pure preferred houses required.”

Last year, Pomona Capital extended a back-levered preferred tranche to London-headquartered Palamon Capital, touted as the first such deal of its kind.

Almost 70 percent of respondents said they are seeing secondaries deals getting done that should not, at least not at current prices.

“Competitors always like to look at deals that other firms completed and say, that wasn’t a good deal to do,” said co-head of secondaries at Pantheon Matt Jones.