Secondaries market activity dropped from its lofty 2021 high last year, yet still posted its second-largest year on record, data from Evercore shows.
There was $103 billion of transaction volume in the 12 months to end-January, the investment bank noted in its 2022 Secondary Market Synopsis, shared with Secondaries Investor. The market is sitting on a record level of dry powder, estimated at $131 billion, Evercore noted.
“The secondary market is on an upward trajectory,” Lea Lazaric Calvert, senior managing director and head of Evercore’s European private capital advisory team, told Secondaries Investor. “It is still a fraction of the primary private equity market, so I think the growth prospects are very attractive.”
Over 90 secondaries investors, including non-traditional investors such as public and private pension plans, sovereign wealth funds with a dedicated secondaries allocation and family offices, participated in the survey.
LP-led transactions accounted for the majority of last year’s activity, with $55 billion of volume. This was down from the $66 billion of volume the previous year.
Active portfolio management was the main driver for activity at 74 percent. This declined on the previous year when 84 percent of respondents cited this as a the main factor driving processes.
There was a meaningful uptick in investors selling to address regulatory pressure, with 13 percent of respondents indicating this was a driver compared with 2 percent the prior year.
GP-led transactions accounted for around 46 percent of transaction volume, remaining buoyant amid overall market volatility. Although down from the $68 billion of activity in 2021, last year’s $48 billion of GP-led transaction volume still represented the second largest year ever for such activity – up by 49 percent compared with the previous peak of $32 billion in 2020, the report noted.
Activity last year was in part driven by more challenging IPO and M&A markets, and GP-led solutions offering a path to liquidity for managers’ LPs, Evercore added.
Asset deals – single-asset or multi-asset continuation fund transactions and strip sale transactions – represented 81 percent of GP-led volume. Of that, 52 percent were related to single-asset transactions.
Cash to spend
The level of dry powder for secondaries is up from the $105 billion available at the beginning of 2021.
The report noted the $131 billion of dry powder does not include the additional investment capacity created through leverage/deferred payment – largely supporting the LP market – or the increasing number of primary investors and non-traditional investors – such as hedge funds – selectively investing in continuation fund transactions.
“There is a lot of non-traditional capital coming into this space – both raising capital but also investing from different pockets,” said Lazaric Calvert. “We’re seeing a lot of primary investors coming into the deals that we bring to market, much more than there was two years ago.”
When it comes to fundraising, secondaries raises have been slower than anticipated – in line with broader private markets strategies – while LP appetite for the strategy remains high, the report noted.
Additionally, $94 billion of capital is planned to be raised over the next 12 months. This compares with $76 billion secondaries funds were seeking at the beginning of last year. This year’s fundraising pipeline includes an increase in anticipated fundraising activity for infrastructure, private credit and real estate investment strategies.
“Secondaries remains one of the few undercapitalised areas in private markets, and it’s a strategy that continues to gain significant momentum, with an ever-expanding investment opportunity set and increasing number of new market participants,” the report noted.
This year, Evercore anticipates the combination of the denominator effect and the need for LPs to re-up meaningfully with their core GPs will continue to bring more opportunistic sellers to the secondaries market. If public and private valuations converge further bridging the bid-ask spread, there could be a flurry of LP-led deal activity this year, the adviser noted.
Evercore also expects GP-led activity to remain high as managers look to use the secondaries market as an alternative means to provide cash back to investors and keep hold of trophy assets. The adviser also anticipates an uptick in GPs looking to pursue tender offers as a means to provide LPs with a liquidity option while also potentially raising primary capital for their funds out in market.
– Adam Le contributed to this report.