Most investors seeking liquidity in the secondaries market have found prices gradually aligning with their expectations as the bid-ask spread has narrowed over the course of the year.
Fifty-six percent of sellers in the secondaries market said deals closed at their expected prices, according to a recent report by mid-market focused secondaries firm Montana Capital Partners. Seventeen percent of sellers indicated that deals closed at even higher prices than they had anticipated.
The report was based on a survey of 94 institutional investors, 46 percent of which are single- or multi-family offices. The rest are pension funds, asset managers, banks and other types of institutional LPs. Nearly 80 percent of respondents are from Europe.
Pricing for LP-led secondaries started to pick up in the second half of the year as buyers began to deploy newly raised capital, Marco Wulff, managing partner and CEO at Montana Capital Partners, told Secondaries Investor.
Most LPs are able to find comfort if they are able to generate pricing that is at or better than 90 percent of NAV in the current market, Campbell Lutyens‘ head of North America secondaries Gerald Cooper explained. “Last year, 90 percent was elusive. This year, we’ve been more successful in generating that for our clients.”
The narrower bid-ask spread was also driven by LPs’ effort to meet buyers’ demand. “Secondaries sellers are bringing to market assets that command a lower discount,” such as those that are less cyclical or have younger vintages, Wulff said. In addition, some LPs have adjusted their price expectations downwards, with only 11 percent selecting “attractive valuations” as their most likely reason to sell, compared with 17 percent last year, according to the Montana report.
No one size fits all for LP sellers
The uptick in pricing was welcomed by LPs, who have grown increasingly reliant on the secondaries market to generate liquidity amid slowing distributions from private equity portfolios. According to the Montana report, the primary motivation for LPs to consider selling PE fund stakes was the need for liquidity (26 percent) and strategic repositioning (26 percent), followed by overallocation to PE (16 percent) and poor GP performance (15 percent).
“Strategic repositioning remains a key reason for LPs to sell on the secondaries market but, this year, the need for liquidity has become just as important,” according to Wulff. Two-thirds of survey respondents said distributions in 2023 to date were lower than expected, he added.
Yet cash-abundant LPs, particularly the large institutional ones, are unlikely to sell in the secondaries market solely for liquidity reasons, Cooper said. Although there are “definitely” LPs that are under allocation pressure, are experiencing negative cashflow, and are fielding more capital calls year-to-date than distributions, there are also investors that are selling in the secondaries market that have cash and are not forced sellers.
“[Those investors] are being prudent in terms of how they manage the portfolio,” he explained. “The market has rebounded, and so they are taking advantage of that.”