Pent-up demand points to big 2021 for secondaries

Demand among buyers and LPs’ desire to manage their portfolios in the wake of covid-19 point to healthy transaction secondaries volumes in the year ahead.

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Secondaries transaction volumes dropped dramatically in the first half of 2020 as the coronavirus hit. According to advisor Greenhill, around $18 billion of dealflow took place in the six months to June, a 57 percent year-on-year decline. A flurry of GP-led deals hit the market in the months after lockdown, though how many will get done before year-end is unclear.

While dealmaking was a struggle, fundraising soared. Secondaries funds that held final closes during the first three quarters of the year raised $59.7 billion, exceeding all full-year tallies on record, according to PEI data. The average fund to close was $1.7 billion in size, the first time this figure has exceeded $1 billion.

Ardian and Lexington Partners tied the record for largest dedicated secondaries fund, both raising $14 billion. Blackstone Strategic Partners closed a $3.75 billion infrastructure vehicle and Goldman Sachs Asset Management a $2.75 billion real estate fund – the largest and third-largest secondaries funds raised in those asset classes.

With HarbourVest Partners’ Dover Street X closing early in the fourth quarter on $8.1 billion and expected closes for funds such as Goldman’s Vintage VIII and Coller Capital’s International Partners VIII, fundraising should increase by at least $20 billion before the year is out.

The figures are more muted when it comes to other secondaries strategies. Only 10 percent of respondents are planning to commit to a real estate secondaries fund over the next 12 months. Interest in private debt and infrastructure is in the low double digits at 12 percent and 17 percent, respectively. Investors have clearly been piling in, though sister title Private Equity International’s LP Perspectives 2021 Study suggests that some appetite remains. A full 48 percent of LPs plan to commit capital to a private equity secondaries fund over the next 12 months, compared with 44 percent in last year’s study.

The proportion of private equity LPs that plan to buy, sell or buy and sell on the secondaries market is also higher this year at 49 percent. In the other asset classes surveyed for this study, around 80 percent have no plans to do any of the above.

Secondaries fundraising has always been lumpy, dominated by the largest names. This year’s results suggest that could be changing. Huge amounts have been raised for secondaries in 2020, but there are big names in market that  could make 2021 – though not a record year – at least a very good one.

AlpInvest Partners is approaching the $8 billion target of its seventh secondaries programme, while LGT Capital Partners, Morgan Stanley, Hamilton Lane and Neuberger Berman are raising funds with a combined target of $13.3 billion that are likely to close in 2021. New, large entrants, such as TPG, Brookfield and Manulife, are expected to start raising their debut funds.

“What [institutional investors] need now is sometimes they want to reshuffle their portfolio… As a result of that, a whole business has emerged of secondaries and trading the LP commitments that are in funds,” says Brookfield’s chief executive Bruce Flatt about the opportunity represented by secondaries, speaking on an investor call this year, adding that it could be a “$25 billion to $50 billion business for us”.

The increase in investors planning to buy and sell on the market over the next 12 months is driven by several factors. The secondaries market was effectively closed between late March and August due to the difficulty of valuing assets during a time of economic volatility. Now the market is stabilising, LPs are looking at the impact of coronavirus on their portfolios and considering rebalancing their exposure.

At the same time, there are a number of secondaries buyers who are behind on their commitment pace due to the virus and are keen to put money to work. In the past 18 months, more LPs have become regular buyers of secondaries stakes and are becoming increasingly sophisticated in the kinds of deal they will back.

“Given our cheque size – staff can commit up to $130 million without board approval – we would like to have the ability to influence terms when appropriate and perform proper due diligence [on GP-led secondaries deals],” Christopher Wagner, principal investment officer, alternative assets at Los Angeles County Employees Retirement Association, said.

This article first appeared in sister publication Private Equity International