LPs want liquidity – but at what cost?

There were 15 $1bn-plus LP-led portfolios brought to market in the first half of 2023, and market participants anticipate more LPs will follow suit. How many transactions will get over the line?

LP-led transactions drove secondaries deal volume in the first half, with most market participants expecting the second half to follow the same pattern. Pricing, however, remains a sticking point.

Fifteen $1 billion-plus LP-led portfolios were brought to market in the first half, featuring a balance of repeat and new sellers, according to PJT Park Hill’s first-half report. After deciding to wait on the sidelines in 2022, given wider market volatility, a bump in secondaries market pricing – ranging anywhere from 400 to 600 basis points over the course of the first quarter – has led many investors to test the waters, Chris Areson, a partner in PJT’s private capital solutions group, told Secondaries Investor this week.

Also this week, it emerged that Ardian has lined up to buy part of a fund portfolio Canada Pension Plan Investment Board has been shopping. The secondaries giant isn’t taking the full $2 billion portfolio, with sources telling affiliate title Buyouts Ardian was able to pick and choose what it wanted out of the pool. If the sale were to  close this week, it would be at around a double-digit discount, a source said.

Not all LP transactions – including those 15 PJT referenced – will get done. CPPIB chose to pull the co-investment component of its proposed sale based on pricing coming in too low, Buyouts reported. State of Michigan Retirement Systems also pulled back on its own proposed secondaries sale, which was said to be valued at $1 billion-plus, for the same reason, according to another Buyouts report.

Experienced LP seller BCI takes the view that discounts are to be accepted for all-important liquidity. The investor sold a portfolio of private equity stakes in June, with another expected to close by year-end, global head of private equity Jim Pittman told affiliate title Private Equity International. Pittman noted that the pair will generate “up to a billion-and-a-half” dollars of liquidity. It has been taking “somewhere in the order of magnitude 15 percent discounts”, but believes its portfolio is 10 percent overvalued in general.

“It is not an ideal market to sell. But you’ve got to take a view as to: is the NAV inflated? Is that the true value of the portfolio?” Pittman said. “We don’t think we’re taking a very large discount, we just think we’re reflecting what’s going on in the market. And liquidity is an important factor just to be able to have C$2 billion [$1.5 billion; €1.4 billion] available to continue to do deals.”

The bid-ask spread is expected to continue to tighten over the coming months (assuming there are no further market shocks). A number of managers are rounding off fundraisings after an elongated time in market, which will pump more fuel into the market – Ardian, for example, is reported to have recently held a close on around $20 billion for its ninth secondaries fund, and Lexington has amassed over $18 billion for its 10th flagship.

Not all LPs are as bold as BCI, with many institutional investors opting to take more conservative action in private markets. Although there is ample demand from LPs, the volume of LP sales will rely on the pricing these portfolios are able to command.

“The question is always: do you want to take a 10 or 15 percent discount?” Pittman said. “Many LPs do not want to take discounts, and it’s a very active position to be a seller in the market.”