Lazard has released its Financial Sponsor Secondary Market 2018 Year-End Review, obtained exclusively by Secondaries Investor.
The advisor estimates sponsor-led transaction volumes hit $22 billion last year across 53 deals, a 38 percent increase in value terms on the $16 billion recorded in 2017 and three times the figure recorded in 2016. Here are four main takeaways from the report.
The US discovers GP-leds
A common question in recent years has been why GP-led transactions have proved more popular in Europe than in North America. Whatever the reasons, they do not appear to be deep rooted. In 2018, the US overtook Europe as the largest source of deal volume in the sponsor-led market, in both value and volume terms. This was largely due to a decline in European real asset transactions, which had an exceptional 2017, according to Lazard, and an increase in US large-cap private equity transactions from names such as Providence Equity Partners and TPG.
A big 2019 for energy
The GP-led process on a fund managed by energy general partner Lime Rock Partners and the proposed restructuring of Denham Capital’s 2005-vintage fund could point to a strong year for deals in the energy sector.
“There’s a global phenomenon of private companies staying private longer,” Holcombe Green, Lazard’s head of secondaries advisory, told Secondaries Investor. “Energy firms [in particular] have the need to find non-traditional routes to liquidity in order to deliver cash back to investors in what has been a relatively illiquid underlying market in recent years.”
Bigger deals mean more buyers
In 2015 and 2016, 100 percent of the deals on which Lazard advised had either one or two backers. In 2018 that figure was only 25 percent. While leading a transaction offers the ability to shape terms and more potential upside, the growing number and complexity of sponsor-led deals means that buyers have to pick and choose where they lead and where they’re happy to be a co-investor, Lazard noted.
Last year also saw a number of smaller secondaries buyers lead transactions for the first time, partly as a way of diferentiating themselves from their peers. Lazard expects to see more of this as the GP-led market grows.
NEA not a one-off in the VC sector
Venture capital deals accounted for about 10 percent of secondaries GP-led volumes last year, a large chunk of which was the $1.35 billion spinout from New Enterprise Associates. The process involved moving 31 assets that needed more time to reach their potential into a vehicle backed by secondaries capital and managed by newly formed GP NewView Capital, run by former NEA partner Ravi Viswanathan.
The dynamics of the market suggest that this is unlikely to be a one-off. Capital invested in VC has increased by 3x between 2007 and 2015, from $46 billion to $151 billion, yet exits are not keeping pace. There was $64 billion worth of listings by VC-backed companies in 2018, compared with a peak of $91 billion in 2012, Lazard noted.
Being a riskier, more concentrated asset class, smaller VC firms may face difficulty running secondaries processes while marquee names are likely to be met with a lot of interest, Green said.