This article is sponsored by Greenhill and appears in the March GP-led Secondaries Special Report by affiliate title Private Equity International.
GP-led deals now account for a significant proportion of the secondaries market: their share has grown from 7 percent of annual secondaries value in 2013 to 44 percent in 2020, according to Greenhill figures. How much more can the market grow? And where will this growth come from? We spoke to Briac Houtteville, managing director and co-head of European capital advisory, and Lloyd Bradbury, principal and head of Asia-Pacific capital advisory at Greenhill, to find out.
The GP-led secondaries market has been very active over the past few months. What types of deals and structures are you seeing?
Briac Houtteville: Our figures show the secondaries market reached $60 billion in 2020 – that is down on the previous year, but when seen in the context of very limited activity in the first half, it is a strong figure. Of this, $26 billion was in GP-led secondaries deals, approaching half the market.
Nearly three-quarters of GP-led deals last year were completed via continuation vehicles, of which 42 percent were multi-asset deals and 31 percent single-asset transactions. Even in the multi-asset deals, we saw increasing concentration so that the vehicles were often structured around two or three companies. There were some strip sales, spin-outs, preferred equity deals and tender offers, but these made up a smaller proportion of the total market.
To what extent has the pandemic affected the GP-led market?
BH: The pandemic has accelerated the market’s evolution. As covid-19 affected portfolios, GPs sought further time and capital to continue to develop strong businesses as investment horizons were pushed out. For buyers, these deals presented opportunities that were easier to due diligence than the entire portfolios you see in LP-led deals – it is much harder to evaluate and value large numbers of assets in the middle of a pandemic.
The arrival of additional high-quality GPs on the market has been the biggest trend post-pandemic. These are some of the top performing managers and there is generally a pre-existing relationship with the ultimate buyers. The assets involved are covid-resilient and, for the deals to work, there has to be strong alignment between GPs and buyers.
Are the trends we are seeing a response to more difficult exit markets?
BH: If an asset cannot exit for whatever reason, it is not necessarily the right candidate for a GP-led process. Rather, we are now seeing longer holding periods for assets and secondaries players are enabling that by helping offer a liquidity option for existing investors at a logical time in the asset’s lifecycle. GPs are also looking to these deals as a way of bringing capital into businesses to grow them into the future.
GP-led deals are seen as an alternative to exit. Is this an enduring trend?
BH: Certainly. GP-led deals are a real alternative to the more traditional M&A, IPO and sale-to-sponsor routes. This is apparent from the GP names that are now coming into the market. These deals give GPs the chance to offer liquidity while holding onto an asset they know well. I expect this is where we will see most growth.
Lloyd Bradbury: GPs now have a very varied toolkit to manage distributions during a fund’s lifecycle. For a heavily marked-up portfolio, GPs could consider a strip sale to crystallise some value and de-risk the assets. We are even seeing pre-IPO assets being moved into new vehicles to provide LP optionality around the lock-up period and capitalise on strong pre-IPO investor demand.
How is the competitive landscape changing?
BH: There is around $175 billion (including leverage) today of total secondaries dry powder, but the GP-led part of the market remains undercapitalised. We are seeing new entrants to the space and asset managers raising dedicated GP-led secondaries funds for example. These will partly close the gap over the longer term. Yet buyers’ focus remains on high-quality opportunities and so there is strong competition for the best deals. Existing relationships are therefore very important. Around 30 percent of deals last year either did not get completed or are on hold, so discipline remains high.
Much of the growth in GP-led deals has been in the US and Europe. Could we see more in Asia-Pacific?
LB: We have already seen a meaningful amount of activity in Asia-Pacific. Last year the region accounted for 6 percent of GP-led deal volume and over the past five years GP-led deals worth a total of $12 billion have been completed. Most of the activity has centred around multi-asset continuation funds, strip sales and tender offers. Though we have not seen as many single-asset deals as elsewhere, this will change. Many of the trends we have seen in the US and Europe are playing out in Asia-Pacific too.
What has held back market growth?
LB: When we look at secondary dry powder for Asia-Pacific assets, we can see a clear pathway for the market to be four or five times larger than it is today and for the GP-led and LP-led markets to be split 50:50. Market participants are looking for the right opportunities – top-tier GPs, high-quality assets and clear long-term pathways to value creation. Given the emerging market risks that are inherent in many geographies across the region, it becomes even more critical that these ingredients are in place. It is incumbent on advisors and GPs to work together to make sure the transaction rationale is sound and that due diligence processes are well managed and transparent.
What will drive activity in Asia-Pacific?
LB: There are two big drivers. One is that AUM in Chinese private equity has exploded – nearly $1 trillion has been deployed in the space of a decade – yet distributions have remained slow and there is a huge liquidity gap for both RMB and US dollar funds. GP-led transactions can be well placed to bridge this gap. We are seeing moves to use US dollar capital to offer liquidity to RMB funds, which can now be facilitated through China’s Qualified Foreign Limited Partnership scheme.
The other is that the IPO window has been wide open for the past nine to 12 months. This window will not be open forever and top GPs are already starting to plan for this risk – GP-led deals will be strong contenders here.