Cost of capital front of mind as Lexington closes industry’s biggest fund

The firm's $22.7bn haul this week comes at a time when institutional investors are assessing the opportunity cost of their investments.

This time last year we were marvelling at the final close of Strategic Partners‘ record $22.2 billion haul for what was then the largest secondaries fund of all time.

Just one year on and we find ourselves mouths agape again at Lexington Partners‘ latest fundraise, which has set a new record for the biggest secondaries vehicle. At $22.7 billion, Lexington Capital Partners X is also the ninth largest private equity fund of all time, eclipsed only by buyout mega-funds from the likes of CVC Capital Partners, Clayton Dubilier & Rice, Advent International, Blackstone and a few others.

It’s worth noting that we’re measuring standalone secondaries vehicles here. As a programme, Blackstone’s secondaries unit has almost $25 billion’s worth of firepower, if you include the $2.7 billion concurrently raised for its dedicated GP-led fund. And don’t forget that Ardian raised $19 billion for its ASF VIII programme, which comprised a $14 billion standalone fund and $5 billion for co-investments (the Paris-headquartered firm is also expected to wrap up its latest programme this year on more than $20 billion).

For Lexington, this is the firm’s first fund to close after its acquisition by Franklin Templeton in 2022. Private wealth capital, including family offices, accounted for roughly one-fifth of the capital in LCP X, with “significant” capital raised via Morgan Stanley, JP Morgan and the former private wealth channels of Credit Suisse, according to Wil Warren, Lexington’s president, who spoke with Secondaries Investor this week.

So, what is front of mind for Lexington as it looks to continue deploying the remaining 60 percent of its latest fund? On the LP portfolio side, it isn’t institutional investors being overallocated to private markets – a topic that has been making headlines for well over a year. Indeed, as a measure to alleviate overallocation issues, selling exposure on the secondaries market ranked fourth among LPs responding to affiliate title Private Equity International‘s LP Perspectives Study 2024. LPs would rather remain overallocated, wait for a market correction, or adjust allocation targets, before selling exposure, they said.

According to Warren, focusing on overallocation is missing the forest for the trees. A sophisticated board can increase its target allocations; the bigger issue is liquidity. In the current environment, investors have significant opportunity cost calculations across their overall asset allocation and will consider expected returns by asset class, he said.

“This seems to be a new set of investment options and opportunity costs to consider,” Warren said. “The cost of capital has increased very quickly and markets will adjust over time.”

Wider acceptance of the secondaries market, too, is playing a role. According to Warren, around 1-2 percent of private markets exposure traded hands in the 1990s. Looking back over the past three decades across Lexington’s data set, that figure is closer to 11-12 percent.

“The acceptance of the secondaries market, the turnover rate, the number of primary investors that seek early liquidity, that’s grown very significantly. Once a significant secondaries market begins – a source of liquidity begins – they tend to grow,” he said, citing the secondaries market for high-yield bonds in the 1990s as an example. “That market has just continued to grow. I think it helps to fuel the primary market. I don’t know of many secondaries markets that shrink.”

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If you like engaging in discussions about the secondaries market’s capitalisation, the future of fundraising for the strategy and liquidity in private markets, I’ll be delving into these topics and more during multiple secondaries panel sessions at PEI’s NEXUS 2024 event in Orlando, Florida on 6-8 March. We’ll be joined by an extraordinary array of industry leaders including Whitehorse Liquidity Partners’ Yann Robard, Evercore’s Nigel Dawn, Manulife’s Paul Sanabria and more. Check out the full speaker list and agenda here.