GP-led secondaries have become an increasingly established exit path for LPs amid the scarcity of more conventional exit options.
Continuation vehicle transactions are expected to account for 9 percent of total PE distributions to LPs in 2023, according to preliminary data that mid-market investment bank Baird shared with Secondaries Investor. The figure has seen a consistent annual increase since 2016 and is up from 5 percent in 2022, Baird noted.
Private equity vehicles are expected to have distributed a total of $530 billion in 2023, a significant decrease from $840 billion in 2022 and $1.24 trillion in 2021, according to Baird’s data. In fact, 2023 will likely be the worst or second-worst year for private equity distributions in 25 years, according to Andrea Auerbach, head of global private investments at Cambridge Associates, who recently spoke with affiliate title PE Hub.
The slowdown of more traditional exit strategies has driven a slump in private equity distributions, which in turn has spurred the growth of the GP-led market. “It is very much developing into an institutional capital market, mirroring the advent of leveraged finance and PE-backed M&A in prior decades,” said Jeremy Duksin, co-head of the global GP solutions group at Baird.
LP appetite for GP-led strategies is on the up. Thirty-three percent of LPs invested in one or more GP-led secondaries funds in 2023, up from 28 percent in 2022, according to the latest LP Perspectives Study from affiliate title Private Equity International. A further 16 percent of respondents plan to commit to GP-led secondaries funds but have not yet done so – an increase of 5 percentage points from the previous year.
While some LPs are concerned by certain aspects of GP-led investments, such as the brief decision window offered by GPs when cashing out or rolling into new continuation vehicles, most LPs are supportive of GP-leds that are well structured and follow the right process, according to Alex Mejia, co-head of the global GP solutions group at Baird.
Duksin noted that as the industry advances, advisers will become more sophisticated, integrating with investment banking industry coverage – an area they historically had limited or no incorporation with.
“As these transactions have become more concentrated and single-asset orientated, financial sponsors have expected their advisers to deliver high-quality, industry-related advice and content in conjunction with execution,” he said. “This is a new phenomenon that’s driving a disruption in market share among advisers in our space.”