Liquidity the primary use case for GPs looking to enter secondaries processes – PJT

The majority of managers looking to tap the secondaries market are seeking to generate liquidity within their funds, according to a report from PJT Park Hill.

There was a record number of continuation fund opportunities in the market last year, according to PJT’s 2023 Secondary Market Insight report. GP-led transactions made up $48 billion of the $115 billion of secondaries market volume with around 46 percent of that GP-led volume closing in the fourth quarter. LP-led activity made up $60 billion of volume with the remaining taken up by structured liquidity options.

Just over half of GP respondents to PJT’s market survey indicated liquidity was the driver for a secondaries process. More than a quarter of GPs looked to the secondaries market for an extended hold period over their assets, while a further 18 percent had a need for unfunded commitments for their assets.

Optimal GP-led transactions incorporate a strong performing company with identifiable upside of 2.5x-plus to be realised over the next three to five years and strong manager alignment, Darren Schluter, a managing director in PJT’s private capital solutions group, told Secondaries Investor. In some cases, these assets will use unfunded commitments to drive acquisitions.

The need for liquidity in the current market is clear, Schluter said, adding: “Ultimately, a successful transaction needs to satisfy all key requirements.” For GPs that seek secondaries processes to generate liquidity in their funds, the success rate has been 70 percent over the last 12 months.

Just under half of the GP respondents said it was either likely or highly likely they would look to use the secondaries market across the next 24 months. Around one-third of GPs indicated they would use the market opportunistically.

Of the survey respondents, 52 percent said they had currently or previously used the secondaries market.

More LPs indicated they would look to commit to the continuation fund market in future. One-third of LPs said they had deployed or were planning to deploy in the continuation fund market, giving a strong indication of new buyer entrants into the GP-led market over the next two years, according to the report. Historically, 18 percent of LPs indicated they would back the continuation fund market.

“It’s clear that for the GP Solutions market to grow, there needs to be an increase in lead buyers that are setting up specific teams,” Schluter said. The majority of new lead investors will be traditional managers looking to enter the GP-led space, complemented by LPs looking to “opportunistically and meaningfully participate on the buyside”, he added.

Traditional LPs will still look to lead or take a syndicate role in GP-led processes – something that will occur on a slightly longer timeline, Schluter said.

Buyouts remains in favour

Secondaries dry powder at the end of last year sat at $170 billion, down from the $225 billion available to deploy into deals the prior year.

Around two-thirds of that dry powder is focused on buyout opportunities, followed by infrastructure with 14 percent of capital to deploy. Credit, growth, real estate and venture each have a single-digit percentage of dry powder chasing those asset classes.

While dry powder follows the general composition of the direct market, which is majority buyout focused, some asset classes are seeing “great interest” from secondaries market participants given their growth rates, Schluter said. The demand for private credit is driving new entrants into both the direct and secondary channels. Amid a slowdown in the VC and growth direct markets, there has been meaningful growth in the secondaries market targeting these asset classes given the sizeable amount of NAV available and lack of necessary transaction experience/underwriting expertise, according to Schluter.

“It’s clear the secondary market will continue to address the liquidity needs and investment demand for the greater market,” Schluter added.

There is continued appetite from buyers for LP portfolios moving into 2024 with 48 percent of capital chasing these trades. LP-led pricing across asset classes improved last year on 2022 averages, apart from venture capital, which had average pricing of 60-65 percent of NAV as GPs were reluctant to mark down valuations, the report found. LP-led buyout trades had a meaningful price improvement last year, averaging 90-95 percent of NAV.

Around 45 percent of capital is chasing GP-led transactions, which is a meaningful uplift on the around 25 percent of capital seeking to back these transactions in 2022. The remaining capital has been reserved for structured liquidity processes.