LP portfolio mosaic deals, in which a sale is split among multiple buyers, have been picking up steam as the secondaries market matures, according to observations from some market participants.

The share of multi-buyer mosaic transactions reached 63 percent of all LP portfolio sales advised by Greenhill last year, according to the firm’s FY 2023 Global Secondary Market Review. This was an all-time high and up from 50 percent in 2022. Mosaic deals have been especially popular among mixed-quality and more diversified portfolios, according to the report.

A rise in mosaic deals shouldn’t be a surprise in today’s LP-led market, which, according to a North America-based adviser, is “white hot” as $1 billion-plus portfolios surface more often than before. Buyers have gained the upper hand in some transactions and the freedom to “cherry pick” their favourite assets. Sellers may also leverage mosaic transactions to maximise returns by tailoring sales strategies for different assets within a diversified portfolio.

However, it’s not all rosy for buyers despite the advantages. Those who can’t discern outperforming assets from the expanding array of LP portfolios available on the market could fall behind their peers in returns, one buyer told Secondaries Investor.

“You have to be very thoughtful about what you are buying and how that plays into your portfolio,” the buyer said, adding that they expect a wider performance gap among secondaries funds as now there are a broader variety of assets in buyers’ portfolios.

For buyers who also invest in single-asset continuation vehicles from their flagship generic funds, this may add to the growing performance gap, the buyer said. “For the first time in a long time, you’re seeing secondary fund managers are differing quite widely: who did one [continuation vehicle] that’s concentrated, and who did not?”

Others disagree that a wider array of choices for buyers will lead to dispersion in returns. One adviser tells Secondaries Investor they expect the overall performance of secondaries funds to improve in a buyers’ market if investors are underwriting assets they know the best, while a London-based buyer points out that returns of secondaries funds are more dependent on the discount rather than the quality of the assets.

“Secondaries is a pretty diversified bet either way,” says the buyer.

It could take some time to evaluate mosaic transactions’ impact on divergence of returns. Yet even if the London-based buyer is right – that the returns on secondaries funds depend more on the discounts rather than the asset quality – dispersions in returns are likely. Pricing in mosaic deals appears to have been subject to wide dispersions themselves, with Greenhill observing “aggressive bidding behaviour” from buyers chasing high-quality mosaic transactions last year. The result was spreads as large as 20 percentage points between highest and lowest offers.

It’s unclear at what price these transactions ultimately traded at. Still, with views on an asset’s worth diverging so greatly, ultimate returns from these transactions could be similarly divergent in the years to come.

Write to the author: hannah.z@pei.group

– This article was updated to reflect that the North American source was an adviser, and not a lawyer.