Macro headwinds affecting alternatives and markets more broadly are spurring on more opportunities for secondaries buyers, but capital available to deploy into the market is choking transaction volumes.
The level of dry powder for secondaries sits at $94 billion, up year-on-year and a slight decrease from the $105 billion available for deployment at the end of 2021 after an active first half, Evercore Private Capital Advisory’s H1 2022 Secondary Market report found.
The secondaries market “is quite different in the sense that there’s less than one year of dry powder”, Nigel Dawn, head of Evercore’s private capital advisory group, told Secondaries Investor. “It’s just an undercapitalised part of the overall private equity market right now. Saying undercapitalised and private equity in the same sentence is not typical.”
Secondaries fundraising dipped 30 percent year-over-year in the first half with $31.2 billion raised, according to data from Secondaries Investor. The next 12 months are expected to be strong for secondaries fundraising, with $111 billion of capital planned to be raised, compared with the $64 billion that was targeted for the equivalent period in 2021, according to Evercore’s report.
However, fundraising has slowed down, particularly for those shops that are over-indexed to investors based in North America generally and the US specifically, Dawn said.
Potential record breaker
Lexington Partners and Ardian are both out targeting $15 billion raises, which would break the $14 billion record for each of their previous stand-alone funds. Blackstone Strategic Partners could also surpass the market record of $14 billion if it raises the “approximately $20 billion” president and COO Jon Gray has touted on recent earnings calls.
Like other private markets strategies, investors are committing to funds after initial closes, when there is more visibility on investments that funds have already made, Dawn said.
LPs are not going to sell off in a market if they don’t have to. The question for the balance of the year will be whether investors need to sell to start funding their capital calls as distributions have slowed down. Dawn expects an increase in the number of LP tender transactions moving forward as GPs look for ways to create liquidity for their LPs.
Overall, Dawn anticipates secondaries deployment will be down from last year’s heights. Although Evercore estimates that first-half transaction volume saw a year-on-year increase of 11 percent, standing at $53 billion, that figure was buoyed by activity completed in the first quarter, Dawn said. A whopping $86 billion of activity in the second half of 2021 took overall yearly volume to $134 billion, as per Evercore’s report.
In the GP-led market, the shortage is not one of opportunity – it’s a shortage of capital and human resources, Dawn said. Of the $94 billion of secondaries dry powder, around 20 percent is available for the most sought-after transaction: single-asset deals.
“You’ve got this mismatch, so what that means is that only the absolute best deals can get done,” Dawn said.
The factors stoking the demand for such deals are similar to those seen in the wake of the coronavirus outbreak, he added. Managers are not able to sell their assets at valuations they’re comfortable with and need to deliver liquidity to investors who are overallocated and struggling to invest in new fund vintages.
“You have this dilemma if you’re a general partner. One solution is a continuation fund, in the sense that I can deliver a liquidity option to my investors. I can sell into a continuation fund at a fair market rate value, but I retain control of the company and can continue to drive value.”
Preferred equity, NAV-based lending and creative securitisation structures, which are new to private equity in this down market, are going to become much more important, Dawn added.
“There’s a little bit of creativity. You’ve got to squeeze it a little bit more to figure out where can we find some new sources of capital.”
Evercore’s report also found:
- Buyers with investment vehicles larger than $5 billion accounted for 60 percent of transaction volume in the first half.
- GP liquidity solutions made up 51 percent of market share – a meaningful contraction compared with the first six months of 2021, when volume was around 60 percent.
- The 49 percent proportion of LP deal volume is significantly higher than it was in the first half of last year, when market share sat at 37 percent.
- Single-asset GP liquidity solutions captured 25 percent of market share in the first half of 2022.
- Preferred equity volume reached $5 billion in the first half of 2022 compared with $3.6 billion in the first six months of 2021.