GP-led secondaries tipped as ‘new normal’ for private equity exits

GP-led secondaries could be seen as a “new normal” for exiting private equity investments, with more traditional liquidity opportunities such as IPOs still below peak levels, William Barrett, co-founder and managing partner of GP advisory company Reach Capital, told affiliate title PE Hub Europe.

New LP entrants are boosting the demand side, he added, although part of the sector is not immune from the valuation gaps that have dogged conventional exit routes.

Such is Reach’s confidence in the growth of GP-led secondaries deals that it launched a team dedicated to the sector in early January.

“If 2023 ends up at €40 billion-€50 billion of GP-leds, then given how we see the success of secondary players in fundraising, how they’re staffing their teams to do more GP-leds and the fact that they’re raising dedicated GP-led funds, we would expect that there should be more this year,” said Barrett. “If we had to put a number, we’d say €50 billion to €60 billion.”

While supply is coming from GPs looking for alternative exit routes, demand is also coming from new LPs entering the sector.

“We are seeing deals where the leads are secondary players,” said Barrett. “But in the syndication you have non-traditional buyers – family offices, for example, that consider GP-led as similar to a co-investment. We are also seeing processes with a couple of insurance companies looking at GP-leds also.

“What if tomorrow CDPQ in Canada and Allianz in Germany say they’re going to allocate €1 billion to GP-leds every year? They could. They should even, to be honest. So that could shape the whole market.”

Face value

While there have been some IPOs of private equity-backed companies in Europe this year, they have been a mixed bag. Triton Partners’ listing of drive product manufacturer Renk Group and EQT’s listing of skincare company Galderma Group have performed well, while CVC’s beauty business Douglas has dropped in trading since its IPO.

But LPs are unconvinced that the exit route has truly returned, said Barrett. “A number of LPs are assuming that there will be little to no IPOs. Today you have more deals being done on the GP-led side than on the IPO side.”

Exits generally have struggled over the last couple of years thanks to rising interest rates lifting the cost of debt and a valuation mismatch between buyers and sellers, particularly where GPs do not want to part at today’s lower prices with assets bought at the high valuations of the halcyon days of 2021.

But the secondaries world has not been immune to such mismatches, particularly in growth equity and venture capital, where some European firms “are not adjusting their NAVs to what they could be worth on the secondary market”, said Barrett.

“And at the same time they have no view at all on the liquidity of the asset itself. A number of LPs are challenging NAVs, notably by comparing what they are getting from different GPs. We saw an example where the difference between valuations was 2x between GP A and GP B.

“As an LP, you might not accept a 50-60 percent discount on your LP stake. And if you’re a GP, you’re not going to do a GP-led at a 50 percent discount on one of your deals. So not much is happening. There’s very little liquidity.”

The issue is particularly acute in the late stage/growth sector, where investors “have many issues right now, especially the next fundraising”, said Barrett.

While early-stage investors get in at low valuations, so they can be more confident of a large multiple later regardless of the valuation, late-stage investors “have no incentive to adapt the valuation”.