There was significant pricing disparity between GP-led and LP-led secondaries transactions in 2022, according to research by Campbell Lutyens.
Fully 80 percent of GP-led positions priced at 90 percent of net asset value or better, down from 93 percent of transactions pricing at the same range in 2021, according to the advisory firm and placement agent’s 2023 Secondary Market Overview.
Despite buyers suggesting they would seek diversified exposure in GP-led transactions, single-asset secondaries outpaced multi-asset continuation funds, with deals totalling $21 billion versus $18.5 billion respectively.
Pricing for LP portfolios fared differently: just 38 percent of transactions priced at 90 percent of NAV or better, compared with 78 percent of transactions that generated that level of pricing in 2021.
LP-led transactions made up the biggest slice of the approximately $106 billion of transaction volume closed last year, according to the report, with 49 percent of volume going to these deals. GP-led deals made up 40 percent of volume, while preferred equity transactions made up 10 percent and direct secondaries transactions made up the remaining 1 percent.
Pricing in the GP-led market was driven by familiarity with buyers opting to back GPs they were most familiar with, that they had invested with in the past, and that had demonstrated a strong track record, Gerald Cooper, head of Campbell Lutyens’ secondaries advisory practice in North America told Secondaries Investor.
As a result, the best deals were able to attract strong pricing while, on the flipside, there were a fair number of GP-led transactions that didn’t get done in 2022 as there were “a number of boxes that weren’t ticked”.
It was a theme that was showcased in the number of single-asset transactions that got over the line, Cooper said, adding: “Quality trumps diversification”.
Buyers put a risk premium on LP-led transactions because they were unable to conduct as deep of a due diligence exercise on LP-led transactions by comparison, they were buying portfolios with mixed assets, and they’re unable to control alignment with the GP, Cooper added.
Thinking outside the box
Campbell Lutyens anticipates there will be increased appetite for structured liquidity given the gap between bid and ask on the LP-led side of the market.
With pricing in the secondaries market for LP interests at between 80 to 85 cents on the dollar, it becomes a more challenging decision for portfolio managers to sell assets, Cooper said, adding that while many investors are facing allocation issues, there aren’t many forced sellers.
In its report, Campbell Lutyens said it has seen a notable increase in the number of LPs that are inquiring about ways to address overallocation beyond straight secondaries sales driven by investors wanting to avoid discounted selling, as well as a greater level of sophistication around collateralised fund obligations and NAV loan structures.
“The structured secondary is an interesting proposition because they can generate liquidity to actively manage their portfolio without selling assets at a discount and without putting undue risk on their investment programme as many of these structured solutions are only recoursed back to the assets that are in the structure,” Cooper said.
“It’s a neat way to ringfence the risk to generate liquidity, but to retain some upside. So if the market rebounds abruptly, you are able to capitalise on the upside.”
On the buyside, there is a lot more flexible capital available – coming not only from dedicated secondaries funds, but from SMAs, asset managers and traditional institutional LPs as well, Cooper said.
“[Those LPs] have the ability to take on secondary exposure that maybe is at the top of the capital stack as opposed to the bottom of the capital stack, so they’re taking on the less risky portion of the exposure and still generating attractive returns – low double digit returns, maybe even low teens returns.”
The larger the liquidity provider, the more flexibility they have in terms of how they structure their capital option, Cooper explained. An asset manager with an insurance arm, for example, could “start to blend together different pools of capital with different hurdle rates”. With that dynamic, LPs can benefit from a range of options that may not be as expensive as equity and may even be cheaper than traditional preferred equity avenues, he added.
The firm also anticipates GPs will pursue clean-up secondaries trades in 2023 with portfolio company exits meaningfully pushed back as a result of ongoing market volatility.
“Buyers are seeking more cherry-picked portfolios at the moment, but this will change in a healthier economy where some of the prevailing risks abate,” the report noted.