Multi-asset continuation funds gained traction last year as investors sought greater diversification than is offered by single-asset deals.
The latter comprised around 40 percent of GP-led secondaries volume in 2022, down from 52 percent the prior year, according to Lazard‘s Secondary Market Report 2022. Meanwhile, Multi-asset continuation funds grew from 31 percent in 2021 to 34 percent last year.
Lazard estimated that the secondaries market saw $102 billion of volume last year, 43 percent of which was in GP-leds. Activity waned in the second half of the year due to a dramatic shift in market sentiment, Holcombe Green, global head of private capital advisory, told Secondaries Investor.
“The first half of the year was actually quite good,” he said, noting that H1 2022 saw some large single asset transactions get over the line.
Lazard is understood to have worked with KKR last year on its single-asset continuation fund for Internet Brands. The deal totalled somewhere in a range of $2 billion to $2.5 billion, affiliate title Buyouts reported last July.
In the second half “it was quite difficult to get anything done that wasn’t either pretty modestly sized in the single asset market or was diversified”, Green said.
“When there is economic uncertainty, secondary investors retreat to what they view as safety,” he added. “And what secondary investors typically view as their own version of safety is diversification. They do more LP deals, and they prefer diversification in their GP deals where they can have more than one way to win.”
Green said the shift to multi-asset continuation fund transactions will continue to accelerate into 2023 as secondaries investors ask for more of these transactions.
Last year was also characterised by a reduction in ticket sizes from both lead and syndicate investors, according to the report.
Around 32 percent of lead commitments were greater than $100 million in 2022, compared with about half of lead commitments the prior year. On the syndicate side, 80 percent of commitments were $50 million or under – in 2021, that proportion was 71 percent.
LP capital constraints played into this trend as there was less money to go around, shrinking the pie for the secondaries syndication market, Green noted. Market incumbents who were known to be syndicate players also sought to lead smaller deals and position themselves as competitors to large lead investors. On top of those two factors, almost all secondaries market players shrunk their commitment sizes to GP-leds.
“[It] was a multifaceted phenomenon that was fundraising-related in that a lot of firms were out raising money and so didn’t want to spend more money that they didn’t have yet,” Green said. “It was [also] diversification related in that [buyers] could make more $100 million commitments than they could two or three $300 million commitments, and it was, I think, uncertainty related in that it was just hard to jump in with both feet in 2022.”
LPs coming to market will embolden buyers
LP-led secondaries activity made up the bulk of volume in 2022, with more than 500 such transactions closing. Over 60 percent of fund stakes, on average, were acquired by buyers who were also an existing investor in underlying funds.
“Buyers, when they saw LP portfolios, were bidding on funds they knew where they felt like they had very good information [on] and could make extremely high quality and high degree of certainty proposals,” Green said, noting that the trend may shift this year as a number of large LP portfolio sales come to market.
“I don’t think we’ll see secondary investors restricting themselves in the same way that they did in 2022… to the extent we do see continued large pension funds and other large institutional investor issuance, that will be an indication that LPs are willing to take the pricing that the secondary market is offering them, which I think will be emboldening for secondary investors in making more diversified, larger proposals to LPs,” he added.
In the first half of 2023, Green anticipates “most, if not nearly all” of LP-led transactions that get done will have some sort of deferral, particularly at the large end of the market. In the GP-led market he also anticipates “we will see more use of deferral than we probably ever have seen before in 2023”.
Half of respondents said they saw over 10 percent of closed LP-led deals utilising a deferred payment structure last year.
“There continues to be a cash spread between bid and ask in the market,” Green said. “On both sides of the market, deferrals are … a pretty straightforward, time-tested way of trying to bridge that gap. They’re a little less accretive than they used to be in a higher interest rate environment, but they continue to be attractive to both sides of the transaction equation in the secondary market.”