In February, there was an uptick in investor appetite and interest in secondary transactions. What is causing this increased focus? First, as transaction volumes have grown rapidly over the past decade, the market is now large enough that it represents an additional route to deploy capital. Second, recapitalisations in the form of secondary transactions have boomed. According to secondaries specialist Landmark Partners, two-thirds of transactions by volume in 2020 were recapitalisations of funds or portfolios, a trend reflected in our conversations with investors. These kinds of deals are appealing to the broadest range of investors.
The definition of “secondaries” has become increasingly broad. The term encompasses not only the relatively straightforward sale of LP interests, but also structured solutions led by sponsors. Continuation vehicles for the recapitalisation of funds, portfolios or single assets, strip sales and fund-level financings are just three of the structures that have become more mainstream.
Range of interests
Investors may be interested in the secondaries market for a number of reasons. Access to liquidity is high on the agenda for those which want clean exits from positions, including as part of a rationalisation of their overall portfolio. From the buy-side perspective, secondaries transactions can provide exposure to identified, high-quality assets and managers.
Manager-led recapitalisations are attractive because their flexibility enables them to deliver multiple strategic objectives. Not only can they extend the life of an investment, giving greater runway to execute a business plan or take advantage of an attractive forward return profile, but additional capital can be raised to expand a portfolio or enhance the asset base.
The secondaries market is not just available to managers. Secondaries structures can also be utilised without a traditional sponsor in place – for example, a joint venture established by a property company in which one of the participants requires liquidity. This offers new investors direct access to underlying portfolios or platforms through the secondary market.
Finally, it is also worth noting that real estate secondaries are prevalent across the risk spectrum. Secondaries funds typically seek opportunistic returns. However, secondaries transactions can also be used to introduce lower cost capital into core, or core-plus assets in stable, income-producing sectors.
Secondaries will not be suitable for every investor. But the breadth of opportunity available, flexibility of structure and continued expansion of the sector suggest that investor appetite is likely to continue to grow.
James Jacobs is London-based managing director and global head of real estate in Lazard’s private capital advisory group.