For all the changes in the secondaries market, the ability to buy good assets at a discount remains important to limited partners, according to Commonfund Capital‘s head of secondaries.
The return characteristics that backers of secondaries funds look for, primarily higher IRRs, come from the discounts that investors can find on the LP half of the market, Cari Lodge told Secondaries Investor. That market also offers attractive benefits like earlier distributions, vintage-year diversification and consistent cash flows.
There are plenty of these opportunities as LPs use the secondaries market to liquidate positions and re-deploy capital, reduce administrative burden and manage risk across the entire portfolio, she said, adding that there is at least $500 billion of unrealised net asset value held in funds that are more than 10 years old: “There’s a lot of high-quality assets that are in tail-end portfolios… I think it’s just a matter of cleaning up line items.”
Pricing has been strong recently, with 52 funds captured in a recent report by marketplace Palico pricing on average at a 1.5 percent discount to NAV. This is driven by soaring NAVs, particularly in sectors such as technology and healthcare.
A rapidly expanding opportunity set on the LP-led and GP-led side is being met by a shortage of financial and human capital, resulting in a buyer-friendly market.
“It’s really been a really great time for secondary investors to be investing,” said Lodge. “And it’s really a win-win for all investors, because the secondary market continues to drive liquidity for all investors,” she added. “Having more optionality is a benefit.”
What about GP?
The sponsor-to-sponsor transaction is being replaced by single-asset continuation funds, according to Lodge. These opportunities continue to be widely syndicated as secondaries investors work to manage their concentration within any single asset.
While the market for single-asset deals will continue to expand, there is going to be a wider spread of quality in those assets as time goes on. Lodge emphasised the importance of doing independent underwriting and not just following the lead buyer.
In any case, Lodge still anticipates there will be continued innovation in this part of the market. Single-asset deals and continuation vehicles are “helping what was once a really illiquid market to have more options for investors,” she said.