Liquidity issues facing LPs and GPs alike are expected to spur further secondaries activity this year, according to market participants who provided affiliate title Private Equity International and Secondaries Investor with their predictions for 2024.
While there was no shortage of opportunities for secondaries buyers last year, there was a mismatch between buyers and sellers on pricing, with secondaries firms taking a cautious approach to transacting. As the bid/ask spread narrows and parties adjust to the new normal, liquidity needs will likely drive more players to the market.
The amount of capital available to deploy into secondaries transactions, however, will continue to limit what can be transacted on.
Below are some of the major trends that market participants are expecting in 2024.
Secondaries an option for LPs lacking DPI
Over the past six to nine months, there has been a steady build-up of confidence as both LPs and buyers get comfortable with valuations again, John Carter, managing partner and CEO of Hollyport Capital, tells PEI. With the pressure to generate liquidity mounting and sellers becoming more accepting of market pricing, he anticipates a “significant pick-up” in LP-led activity.
Discounts on LP portfolios aren’t “going away any time soon”, Valérie Handal, managing director at HarbourVest Partners, notes. Whether or not they will narrow, and by how much, remains to be seen. Nonetheless, Handal doesn’t expect them to “widen massively from where they are today”.
It is a sentiment that Vladimir Colas, co-head of secondaries and primaries at Ardian, agrees with. For high-quality buyout portfolios, Ardian sees pricing in the mid-to-high 80s – particularly for portfolios of size. “I don’t see that changing meaningfully in the next few quarters,” he says, adding that there is still uncertainty in portfolios and that distributions will remain depressed early this year. “You need to price in that extra time for assets to exit [as well as] that uncertainty around growth in 2024.”
Many LP sellers are now anticipating interest rates will remain higher for longer, which could drive a record year for LP portfolio transactions, Partners Group managing director Ross Hamilton says. This will be especially relevant as deferred payments and closings become more prevalent. “Understanding seller needs and offering customised solutions will likely be crucial in unlocking the most attractive transactions.”
If discounts do start to narrow across the year, Ingmar Vallano, a managing partner at Clipway, believes this would open more institutions up to the idea of selling on the secondaries market – and not only overallocated institutions, but also “decently allocated ones that see the benefit of freeing up capacity to be able to support new fundraisings, commit to the managers that they want to back for their next fundraising and have the freedom to do that [via] a significant [commitment] ticket”.
“LPs hope that the world’s going to get resolved through distributions, but the exit markets are not there,” Immanuel Rubin, head of European secondaries at Campbell Lutyens, says. The allocation crunch being faced by investors is “not going to solve itself, and eventually they will have to utilise the secondaries market… I think there’s quite a lot of tailwind”.
Secondaries buyers like the value that LP-led portfolios offer, although there has been insufficient supply for the demand, Rubin adds. Over the course of the past year and into 2024, the market has therefore built up additional dry powder to deploy into LP-led secondaries.
However, HarbourVest managing director David Atterbury says the availability of buyside capital will continue to regulate what transactions will be possible in the space. “There are a whole host of people looking for liquidity – there’s just not enough buyers out there to take down all those portfolios.”
While it will be a “robust environment” for opportunities, it is hard to see market activity doubling in size this year because of the lack of available buyside capital, Atterbury adds.
For secondaries buyers, this presents some interesting opportunities. They may be able to command favourable pricing, Atterbury adds. He also anticipates mosaic solutions will continue, allowing multiple buyers to “cherry-pick” parts of an LP portfolio that fit in with their strategy.
More GPs expected to test the market in 2024
It is a similar picture for GP-led activity. While this part of the market remains undercapitalised, market participants anticipate there will be a strong level of activity in the GP-led space following a year of subdued activity relative to LP-led transactions.
Although activity may not reach the lofty volumes seen in 2021, Veena Isaac, co-head of Apollo Global Management‘s S3 secondaries unit, believes there will be continued strong levels in the GP-led market across mid-cap and large-cap transactions. “[We will also see] creative uses of deferral, leverage and structure to bridge the gap on syndication, price and specific GP needs,” Isaac adds.
In 2023, there was hesitation to bring GP-led processes to the market for fear of deals not getting done, Handal says. She adds that HarbourVest feels there is a queue of transactions getting ready to come to market.
In addition, Handal believes GPs are looking to come to market early in 2024 so they get “the first shot” at capital that is available for GP-leds. “Especially because these transactions have a gestation period and an execution period that is longer than the LP side [of the secondaries market].”
There was a focus on bringing mid-market processes to the secondaries market in 2023 as there was “more certainty around execution [in these transactions] without an extended syndication”, according to Steve Lessar, co-head of Apollo S3.
These transactions also provided more opportunities for buyers to take lead positions during fundraising periods.
Both Handal and Lessar believe there will be more desire for GPs to test the market with larger transactions in 2024 as exit routes remain constrained.
Atterbury also believes there could be more multi-asset GP-led processes that come to market in 2024. Alongside their best assets, managers may look to create liquidity on some of their “less good performers” by including them in a continuation fund process as pressure to sell mounts.
– Adam Le contributed to this story
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