There’s no shortage of supply for secondaries buyers with over $150 billion of live transactions and deals that are forecast to launch in the near term, according to a report by PJT Partners.
“2022 will be the second-largest year on record, we’re forecasting,” Darren Schluter, managing director in the firm’s secondary advisory group, told Secondaries Investor.
PJT expects deal volume will reach between $105 billion and $115 billion this year, a 15 percent annual decrease.
If the many firms in market with secondaries funds can close their vehicles next year, and if there is more consensus around private markets valuations in the coming quarters, this should help with deal volume, Schluter said.
“When you take a look at the next 12 to 24 months versus [the supply in] the next three months, you just really see the continued demand and momentum that’s in this market.”
Selectivity is key
Third quarter deal volume landed between $20 billion to $25 billion, according to PJT estimates, a 30 percent increase quarter-on-quarter. Of that volume, 56 percent were GP-led transactions and 44 percent were LP-led deals.
There were a meaningful number of sub-$500 million mandates launched in the third quarter, focusing on an increased number of buyers with mid-market appetite, the report noted.
Because of the limited amount of capital available to deploy in the secondaries market compared with the supply of opportunities, syndication has become more important to get larger deals over the line, Schluter added.
Buyers are then faced with the choice of whether they commit their capital into larger, syndicated opportunities or whether they seek out a sole buyer opportunity in the mid- and lower mid-markets, for example.
“What you’re seeing is a bunch of buyers raising their hands to say, yes, we want to be in more relevant deals. When I go fundraise, I don’t want to show a bunch of deals that are syndicated, I want to show a bunch of deals that I focused my time and attention on to actually negotiate the structure,” Schluter said.
That’s not to say large GP-led secondaries deals aren’t closing. PJT advised New Jersey-based energy fund manager ECP on its continuation fund for US power company Calpine Corporation, which closed in June on $1.6 billion in capital commitments. The transaction was $5.3 billion in total size, according to PJT’s report. A source familiar with the transaction said the $1.6 billion in commitments raised for the transaction didn’t account for non-ECP fund investors in the asset who were offered liquidity as part of the transaction. PJT declined to comment on that point.
However the bar for getting a large deal across the line is a lot higher in the current market, Schluter said, adding: “The path to successful execution of large GP-led transactions is a targeted structured approach rather than simply bringing a deal to market and hoping for the best.”
Bring out the toolkit
Average pricing for buyout portfolios was between 82 percent to 87 percent of reference date net asset value, the report noted. Pricing for all strategies was down 5 to 10 percentage points year-over-year.
Regardless, there is a consistent flow of LPs looking to leverage the secondaries market this year, Schluter said.
“What that [pricing] range doesn’t really highlight is … there’s some form of structure that’s being instituted to sort of maximise that pricing. Whether that is preferred structures or just simple deferrals – those are the tools in the toolkits that are being used by secondaries investors to effectively put their best foot forward from a pricing perspective.”
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