GP-led deals surged through second half with secondaries set for big year – Jefferies

GP-led secondaries deals such as continuation funds surged through the second half of last year, reaching near-record volume, and are poised to take up more market share this year, according to fresh research from Jefferies.

As sponsor-initiated activity picked up momentum in the latter half of the year, LP portfolio sale volume kept up pace, helping to drive overall secondaries deal activity to around $112 billion, up 4 percent from 2022, Jefferies said. This is in line with Evercore’s estimate of total secondaries activity levels at around $114 billion.

“It’s a pretty exciting time. The market has proved to be incredibly resilient,” said Matt Wesley, global head of the private capital group at Jefferies, in an interview with affiliate title Buyouts.

GP-led activity reached about $52 billion last year, with “strong momentum gained in H2 2023… driven by record secondary investor fundraising and new buy-side entrants”, the survey said. The total represented about 46 percent of total activity, Jefferies found.

Driving activity was strengthening pricing, which was helped along by a stabilisation in interest rates last year, along with an overall improvement in economic outlook.

The second half results for GP-led deals, estimated at $34 billion, represented an 88 percent increase from the first half ($18 billion) and the highest half-year level since the second half of 2021, the survey said. GP-led activity was broken down between around $46 billion in asset sales like continuation funds and tender offers, and $6 billion from structured equity and fund finance, the survey said.

Various factors drove momentum around GP-led deals, including the slower exit environment and LPs’ need for liquidity, along with robust fundraising by existing investors and the entrance of new players, as well as a “growing universe” of syndicate investors, Jefferies said. Fundraising totals came in at about $255 billion last year, the survey said.

With other exit paths slow or effectively closed last year, continuation funds rose to represent about 12 percent of sponsor-led exit volume, Jefferies said, compared with 7 percent in 2022.

“It’s a combination of the education and overall adoption of the technology, the need for liquidity and the need to find ways to generate exits, and a function of the buyers being well capitalised,” Wesley said.

LP portfolio sales, for the second year in a row, led market activity, strengthening from the prior year on better pricing, especially in the second half. “That helped sellers transact certainly in a bigger fashion than they had in 2022,” Wesley said.

LP deals tallied around $60 billion, a 7 percent increase from 2022, Jefferies said. Pricing averaged around 85 percent of net asset value, increasing 400 basis points from the previous year, the survey said. Buyouts especially shone, with pricing reaching 91 percent of net asset value and buyout funds representing about 72 percent of total deal volume, the survey said.

There were 19 LP sales last year over $1 billion, compared with 12 such deals in 2022, Jefferies found. “In 2022, the dynamic was LPs taking big portfolios out to market and really just whittling it down and cherry picking to a smaller subset of funds pricing well,” Wesley said. “With overall pricing improvement on the LP side, that facilitated some of these bigger deals and by extension drove volume much higher.”

With a large stock of capital ready to be invested and pent-up demand between LPs and GPs, the expectation is 2024 could prove to be a strong year. “We think the overall market could be north of $130 billion for 2024,” Wesley said. “That market will be more or less balanced between GP and LP deals.”

Also, “we think 2024 will continue to see greater numbers of $1 billion and multi-billion dollar deals on both the LP and GP side, aided by both continuous improvement to pricing and the capital available in the market today”, Wesley said.