GPs look to multi-asset continuation funds for DPI – Campbell Lutyens

Multi-asset continuation funds are set to become increasingly popular with managers as the hunt for distributions continues.

Such deals made up the biggest proportion of continuation funds last year, representing 47 percent of the $45 billion of GP-led volume, according to Campbell Lutyens’ 2024 Secondary Market Overview report.

Single-asset and highly concentrated continuation funds took out 41 percent of activity – a reversal on 2022 when concentrated transactions outpaced multi-asset deals by 5 percent,

Compared with a single-asset deal, moving multiple assets into a continuation fund can be a “big jump” for distributed to paid-in ratios, with a “big impact”, says Gerald Cooper, head of Campbell Lutyens’ secondaries advisory practice in North America.

“[It can be] the equivalent of three M&A transactions wrapped up in one, and it can be done in a quarter of the amount of time” compared with M&A sales in a difficult market, Cooper tells Secondaries Investor.

There is now “more dry powder than ever” in the secondaries market, Cooper says. According to Campbell Lutyens’ estimates, there was $174 billion available to deploy into secondaries transactions at the start of this year. At the larger end of the spectrum, the buyer universe for multi-asset deals is “a little bit broader than it is [for] single-asset deals”, Cooper says.

There’s “a good cross-section” between quality multi-asset continuation funds in the market coupled with capital from buyers, says Cooper. “You’ve got GPs that strategically benefit from this because it puts them in a better position to fundraise and improves their DPI.”

GP-leds pick up on deferred pricing

The use of deferrals in GP-led secondaries jumped last year with 51 percent of all transactions using a method of delaying payments, up from just 6 percent in 2022, according to Campbell Lutyens’ report.

Of the respondents to Campbell Lutyens’ survey, 63 percent used deferred payments last year, up from half in 2022.

The use of deferrals in GP-led transactions is expected to continue this year, Cooper says, adding that LPs appear to be receptive to the use of deferrals in these transactions. Typically these deferrals are six to 12 months and help to bridge the gap on pricing.

For buyers, the use of deferred pricing can improve their internal rate of return. Secondaries buyers remain highly selective of the opportunities they are looking to back with no shortage of supply.

“If there are ways to improve your return, or reduce your risk, you’re going to take advantage of that in this market,” Cooper says.

Private equity NAVs will increase by around 3-5 percent in December on September marks, Cooper says. “Valuations are not coming down. There’s universal caution around where valuations are and [around] being able to deliver comparable returns that you were delivering in the past… The market’s very focused on that, which is why you’re seeing some of these tools used to try and bridge that gap.”

LPs eye infra sales

Overall transaction volume reached $111 billion last year, with LP-led activity coming in at $56 billion, the report found.

The vast majority of stakes traded were positions in mega-buyout and mid-market buyout funds as buyers flocked to familiarity amid uncertainty.

The sale of infrastructure fund stakes spiked last year, representing 12 percent of funds sold versus 4 percent the previous year. Traditionally there has been more GP-led transactions within the asset class. However, there has been a lot more LP-led dealflow coming to market, Cooper says.

Infrastructure has priced “pretty well consistently over the past couple of years”, he adds. The asset class had an average discount to NAV of 7 percent last year compared with buyout transactions, which averaged at a 12.6 percent discount to NAV.

“With rising volatility in the rest of the market, it’s just a more stable asset class… When LPs are looking at ways to trim allocation to alternatives, they’re still price sensitive,” Cooper says, adding that if LPs are faced with the choice of selling with those average discounts factored in, they are more than likely to sell infrastructure stakes, or at least a portion.

Private credit also saw an increase in selling activity. The amount of funds sold doubled year on year to reach 4 percent of LP-led volume last year.

“The absolute numbers are still small, but as a percentage of the total transaction volume, it was twice as large as last year,” Cooper says. “We think private credit is on every buyer’s whiteboard because there’s so much supply out there in the market… a lot of capital has gone in, people are overallocated to private credit… so we’re starting to see a lot more activity.”