This year has undoubtedly been an inflection point for the secondaries market, not only in terms of transaction volume and M&A activity, but also LP regard.
A clear majority of LPs, 86 percent, believe that the secondaries market in private equity will grow further in the next three years, according to Coller Capital‘s winter barometer of LP sentiment. The report, out this week, represents the views from 102 global investors.
When it comes to the other asset classes, LPs are less bullish. Less than half of investors foresee secondary market expansion in private credit (48 percent), infrastructure (48 percent) and real estate (41 percent).
Despite the soaring transaction volumes and amounts of dry powder, more education is still required in the market at large.
While a majority, 57 percent, believe the principal effect of the recent rise of continuation vehicles will be to strengthen the overall PE ecosystem, the remaining 43 percent think the proliferation is likely to undermine the 10-year fund model.
This may be a false dichotomy: “I do think [continuation vehicles and the 10-year fund model] can coexist,” said Eric Foran, a partner in Coller’s New York office.
The ability to extend the period under which a GP can own a portfolio company gives GPs and LPs more optionality around liquidity, as well as the ability to maintain hard-wrought relationships with management teams.
“LPs have had to change their behaviours and mindset when it comes to reacting to this market,” said Foran. “Five or six years ago, LPs were used to making a 10-year commitment and putting it in the drawer. Now with continuation funds, LPs have to make a decision at some point during that holding period.”
Notably, a higher proportion, 66 percent of respondents, thought the practice would be positive for the portfolio companies transacted upon.
On the other hand, the bar for these transactions, now that they are flooding the market, is rising. Limited partners need to be comfortable with the sponsor’s rationale for a process and why it’s more value-accretive than a straight sale, Karin Hyland, a senior investment director at abrdn, said at affiliate title PEI’s Women in Private Markets Summit earlier this month.
“More and more in the last few months, I’ve seen opportunities come to us that suggest, ‘Has the GP heard of a co-investment?’ or ‘Why is this a continuation fund rather than a co-investment?’” she said.
“Sometimes it just looks like a co-investment with economics attached and secondary players being involved.”