LP sales for liquidity purposes rose four-fold last year – Lazard

Liquidity has become the top reason for LPs selling in the secondaries market, research from Lazard has found.

The need for liquidity drove 44 percent of LP-led transactions last year, a fourfold increase from the year before, according to the investment bank’s Secondary Market Report 2023.

The prior year, the top rationale for selling in LP-initiated deals was portfolio management (64 percent), followed by vehicle wind down (17 percent) and liquidity (10 percent).

“Fourfold is quite high,” Holcombe Green, global head of private capital advisory at Lazard, told Secondaries Investor. He added that the number of LP-led transactions Lazard advised on increased threefold year-on-year.

LPs’ needs for liquidity was also reflected in their reactions to GP-led transactions. When offered the choice to either liquidate their exposure or reinvest into a continuation fund, the vast majority of LPs would sell, Green said.

Most of LP-led portfolios sold last year focused on funds in North America (57 percent) and Western Europe (30 percent), where pricing was the strongest, according to the report.

Buyout and infrastructure have emerged as the most resilient asset classes when it comes to LP-led strategies, with pricing reaching as high as 92.5 percent of net asset value for both asset classes. On the other hand, venture capital funds priced between 55 percent and 70 percent of NAV, while funds of funds had pricing between 70 percent to 78 percent of NAV.

Growth equity, venture capital and funds of funds experience more significant discounts for a variety of reasons, Green said. “For funds of funds, there’s a longer route to liquidity. The venture capital funds… are a less liquid strategy, and in general there’s the perception that venture-backed assets are still relatively highly valued today.”

Secondaries deal volume reached $109 billion last year, the second-highest of all time, according to the report. Last year also marked the third consecutive period where deal volume surpassed $100 billion.

“Across both the GP-led and LP-led markets, a continued lack of liquidity from traditional sources drove investors to seek more innovative methods of generating proceeds through the secondaries market,” Green wrote in the report.

Lazard estimates LP-led transactions made up 56 percent of deal volume last year. GP-led deal activity remained relatively muted in the first half of the year and started to pick up in the second half.

Green expects GP-led deals to make up a bigger portion of deal volume this year as such transactions grow to meet LPs’ liquidity demand.

“Overall, we believe that the second-half volume in 2023 is a harbinger of a new, elevated normal for the GP-led segment,” Green wrote in the report. “As sponsors remain focused on delivering liquidity amid a challenging M&A and IPO environment, we expect 2024 volume to approach or exceed 2021 levels.”