Kirkland & Ellis’s annual Liquidity Solutions Academy took place this month, making a welcome real-life return after a year of pandemic disruption.

One of the highlights was a panel discussion involving five well-known secondaries advisers. Gerald Cooper of Campbell Lutyens, Nigel Dawn of Evercore, Holcombe Green of Lazard, David Perdue of PJT Partners and Matt Wesley of Jefferies spent 90 minutes discussing the state of the market in the session chaired by Secondaries Investor. Here are some highlights:

Buy-side capital constraints are putting a brake on growth

A lack of capital on the buy-side remains a major impediment to the growth of the market, the panellists agreed.

It could be a while before the amount of dry powder matches the opportunity set, though the promise of single-asset deals means the problem should fix itself, Wesley said: “There are plenty of mezzanine and special situations buyers right now who, if they wanted to interpret their docs in different ways, could be in business tomorrow writing $400 million or $500 million cheques.”

Co-investment, secondaries conflict continues

While limited partners are starting to see room for co-investments and single-asset deals in their portfolios, many still need to be convinced they should pay two and 20 for single company exposure via a secondaries fund.

“LPs that would be able to write the largest cheques are battling internally over whether it is a single asset or a co-investment,” said Cooper. “[Right now] if they’re going to make an investment in a single asset, it’s going to be a co-investment as opposed to a secondary.”

Organisational issues also stand in the way, Dawn said: “The mandate of most co-investment teams is to invest on a no-fee, no-carry basis, so if something comes along that’s not on that basis, they often can’t invest. There are a few groups who will look at it on a net return basis versus whether there are fees attached or not, but I think it’s a limited number.”

The GP-led market should stick to what it does best

While the market should strive to make GP-led deals as big a part of a sponsor’s toolkit as an IPO or M&A transaction, advisers should ensure the technology is applied in cases where it is the optimal solution.

“We have to be a little bit careful that this doesn’t become the ‘yeah, but’ solution in the marketplace… I couldn’t get an IPO done just yet so we’ll do a secondary,” said Perdue, adding that he needs to be convinced the sponsor wants to hold on to the company.

The relatively recent trend of a minority stake sale being used to price a continuation fund deal is also an area to tread carefully, Green said: “The secondary market is trying to create the intersection of the Venn diagram between what is good for the GP, for the existing LPs and the new investors. That is different than a counterparty-to-counterparty transaction in the context of the M&A markets.”

GPs and assets with “a story” to get their chance

While there are plenty of top-quality assets to keep the GP-led market ticking over, the trend towards specialisation among buyers could create a window for more challenged assets.

“You will ultimately see more buyers who are not trying to pay high teens, 20s multiples for the most pristine enterprise software businesses. They want to roll up their sleeves and do real work on businesses that have a little bit of a story because they think there’s value to extract,” said Wesley.

GP-led specialists such as TPG could help unlock the market for high-quality assets managed by lower-quality GPs, Dawn said, perhaps by insisting on some control over governance as a condition for backing the deal.

“That could be a substantial source of capital for the market that we are not necessarily taking into account,” he added.

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