Secondaries buyers have time to assess market as liquidity remains at a premium

In a market coloured by uncertainty, The Carlyle Group subsidiary AlpInvest Partners is taking a more measured approach to its short-term capital pacing.

In the longer term, the investor sees a supply of deals building up. “Our view is you stay active throughout any cycle,” Chris Perriello, managing director and co-head of AlpInvest’s secondaries investments team, told Secondaries Investor.

LP-led deals are coming to market, but execution has stalled as the bid-ask spread remains significant. Those portfolios that are trading are smaller than the $1 billion-plus transactions seen last year, Perriello said.

The GP-led market has also remained active, as buyers are more comfortable making valuation decisions at a company level. “It’s just been harder to get a very, very large deal done on the GP side today,” Perriello said.

Two things need to happen before secondaries buyers regain the confidence to trade on larger transaction opportunities: private equity marks need to get a little more realistic, and buyers need to see operating numbers at company level moving into 2023.

“Today [company-level operating numbers] are pretty good, so it’s hard to reconcile what’s happening in the public markets with actual operating performance on a trailing basis,” Perriello explained. “You need to see some of those operating numbers flow through. Buyers are going to look at that, they’re going to look at valuations, and they’re also going to look at their own comfort in, ‘Do we have a better sense of [the] level of recession? What type of downturn are we looking at?’ I think right now, that’s too early.”

In a period where exit avenues have dwindled and distributions are expected to slow as a result, more LPs may tap the secondaries market in the coming months – particularly as they grapple with the denominator effect within their portfolios. Perriello noted there is a significant backlog building, which is expected to hit the market through Q4 and into 2023. GPs, too, will look to secondaries exit avenues amid the turbulence.

For secondaries buyers, this provides more time. “Liquidity is at a premium. We have liquidity,” Perriello said.

In the short term, Perriello expects secondaries buyers will continue to make smaller bets on opportunities that are coming to market, but he doesn’t expect to see “big, big chunky cheques”.

Longer term, buyers will move. “They will start to buy in bulk once they have more comfort around, ‘What do I really need to pay? What does the market look like?’ And, ‘What do I believe in for [2023 and 2024] for operating numbers?’ Even if they’re down, that’s fine. Let’s underwrite that and believe in it,” Perriello added.