Preferred equity deal volume shot up in the first half of the year amid fierce competition from other capital types.
There was $4.1 billion of preferred equity transactions in the six months to 30 June, a 71 percent increase on the same period of last year, according to investment bank Evercore‘s H1 2020 Secondary Market report.
Fully 56 percent of buyers surveyed said they offered preferred equity during the period compared with 21 percent at the end of last year as secondaries firms aimed to take advantage of general partners’ need for liquidity to support struggling assets or make acquisitions brought about by the covid-19 crisis.
Getting preferred equity deals across the line remains a challenge – of the almost two-thirds of the 30 largest buyers who offered preferred equity solutions, only 33 percent closed on their transactions.
“The traditional lending banks exited the secondary market as soon as covid struck but came back relatively quickly,” senior managing director Nigel Dawn told Secondaries Investor. “It generally meant lower-cost options were available … The number of preferred securities that were actually issued, compared with the number discussed, was relatively small.”
The idea of preferred equity as part of secondaries market and its potential uses “really solidified” this year, he added.
London-based buyout shop Exponent Private Equity and DeVos family office Ottawa Avenue Private Capital were among the groups to agree preferred equity deals this year, as Secondaries Investor has reported.
Evercore estimated $18 billion of secondaries market volume in the first half, a decline of 56 percent on the same period last year. GP-led deals, including preferred equity, accounted for 39 percent by volume.
“It would not surprise me if GP-driven transactions were 50 percent of market share [by the end of 2020],” said Dawn. As the exit horizons for portfolio companies have been pushed back, GPs are exploring ways of getting more time and capital, he added.