Increase in LPs seeking to back secondaries funds – LP Perspectives Survey

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An increasing number of investors are looking to back secondaries funds as LPs continue to tap the market amid a dearth of distributions and overallocation issues to private markets.

A majority (59 percent) of LPs plan to commit capital to private equity secondaries funds over the next year – the largest share of investors that have said they will do so across a six-year period, according to affiliate title Private Equity International’s LP Perspectives 2024 Study.

The secondaries market remains in operation at a time when dealmaking and exit activity have slowed, Jacqueline Eaves, a London-based secondaries partner at law firm Goodwin, tells PEI. “It’s almost like a way of hedging between different strategies.”

And while the secondaries industry is raising ever larger funds, new entrants continue to emerge – a sign that the strategy is becoming more established.

LPs, too, are becoming more sophisticated in the way they invest in secondaries funds. Previously, investors would back a large secondaries player and say they had their exposure to the market, says Darren Schluter, a New York-based managing director at PJT Park Hill. “Now it’s: ‘How do I have my mid-market exposure? How do I have my large-cap exposure? How do I have my GP-led exposure?’ You’re seeing the expansion into: ‘In my secondaries book I have two or three managers versus one.’”

A larger proportion of LPs have also invested in dedicated GP-led secondaries funds, with 33 percent reporting that they have backed one vehicle or more compared with 28 percent of respondents last year. The share of LPs planning to invest in GP-led secondaries funds has also risen, with 16 percent saying they intend to do so in the future, up from 11 percent in the 2023 study.

“Transactions only happen if people can get comfortable”

Jacqueline Eaves
Goodwin

Schluter says PJT began to field an increasing number of calls from LPs considering GP-led secondaries funds at the back end of the summer. They were asking for help from the adviser to map the market.

The question LPs have most frequently asked PJT is whether the investment bank has seen crystallised returns from these funds. The firm’s Q3 2023 Secondary Market Insight report found that returns across four continuation funds spanning different sizes ranged from a gross multiple on invested capital of 2x for a $1.5 billion transaction, to a 4.5x return for a €250 million single-asset continuation fund.

The demand from LPs is being driven by GP-led funds currently out raising, as well as greater awareness that there is a supply and demand imbalance, “meaning that there are way more GP-led deals than current demand”, Schluter says.

Back to the classics

The last 18 months have marked a shift in buyer appetite towards LP trades as investors look to the secondaries market to manage their private markets exposure.

While GP-led transactions began to gain traction in 2019, the macro environment in the wake of the covid pandemic gave rise to the normalisation of single-asset continuation funds. Across this period, LP trades became “almost like the less sexy option”, Goodwin’s Eaves says.

59%

LPs that plan to commit to private equity secondaries funds over the next 12 months

33%

LPs that have invested in at least one dedicated GP-led secondaries fund

16%

LPs that have not yet invested in a GP-led fund but would like to

That trend has now swung back, and Eaves anticipates supply and demand for LP-led transactions to continue into 2024. As investors have returned to the secondaries market, it has also given secondaries buyers the opportunity to achieve much-needed diversification, Eaves adds. “The foundations of secondaries are all about diversification and about these LP portfolio trades, essentially.”

The LP Perspectives 2024 Study found that overall investor interest in transacting on the secondaries market remains roughly in line with last year’s findings. The proportion of LPs that are looking to only buy, or to both buy and sell, fund stakes on the secondaries market in the next 12 months has grown over the last year, reaching 32 percent and 9 percent respectively.

LPs such as Florida State Board of Administration and Los Angeles County Employees Retirement Association have been actively tapping the secondaries market as buyers, affiliate title Secondaries Investor has reported. LPs that have set themselves up to lead on secondaries transactions remain a rarity, however. Most LPs with which PJT has spoken want to take an opportunistic approach, Schluter says.

Meanwhile, the proportion of LPs that are looking to only sell stakes on the secondaries market has declined, with 16 percent indicating they are planning to focus on offloading interests compared with 22 percent last year.

‘Watch-and-wait’

Many LPs are not looking to “do transactions for the sake of it” by accepting massive discounts, Eaves says. “Transactions only happen if people can get comfortable. There’s still a bit of watch-and-wait going on,” she adds. There is some frustration on the buyside – although firms are seeking out opportunities, they are not necessarily getting the pricing they would have hoped to achieve.

Fund stakes transactions have been a “pretty buoyant part of the market… consistently so”, with some large transactions achieved across the last year, Eaves says. However, she notes that the “flurry of activity” that some expected has not fully come to pass.