The heightened pace of secondaries fundraising will likely produce a larger and more liquid market for sellers, speakers said at this year’s Private Funds CFO New York Forum during a panel focused on continuation funds.
“If there is more competition in the marketplace,” noted a speaker from a buy-side GP, “there could be tighter bid-ask prices, so there could be an impact on pricing as well”.
A CFO on the panel from a firm active on the sell side pointed out how greater fundraising and the resulting dry powder gives sponsors like his more choices for secondaries transactions.
“There’s that extra optionality as fund managers that we can look at,” said the speaker.
They also recalled that their firm moved its entire portfolio of a growth vehicle into a continuation fund during the covid pandemic before dabbling in single-asset versions of the fund.
Another panellist argued that a deeper market will help to mitigate a vexing topic for continuation funds: primary fund GPs sitting on both sides of the deals.
“More money, more buyers means more competitive process and a better, more robust opportunity to check these transactions given how much conflicts are usually involved,” they said.
Secondaries fundraising hit an annual record in 2023, per findings from Secondaries Investor. It found that final fund closes totalled $117.92 billion, more than double the 2022 count of $53.28 billion.
The new record was 17 percent above the prior one, which was at $101.14 billion in 2020.
Continuation funds power through higher rates
Panellists agreed that the secondaries market has been resilient – and then some – despite the high-rate environment.
“It doesn’t play a huge part other than just general pricing in the secondaries market,” said the sell-side GP CFO.
One speaker noted that continuation funds are useful amid higher rates because GPs don’t have to refinance the debt for their existing assets. And the buy-side panellist, whose firm invests in both the GP-led and LP-led segments of secondaries, said higher rates have not hurt deals in the space.
“From our perspective, transaction volume has still been very resilient even in the high interest rate market,” they noted.
But they pointed out that rates affect buyers indirectly by making fund finance instruments more expensive, which they pointed out isn’t just a problem for secondaries.
“We’ve been paying down our subscription lines much faster,” they said in explaining how his firm has adapted.
Another sell-side CFO pointed out the role that secondaries play in generating liquidity for primary fund investors.
“I actually see the market increasing just given it’s a liquidity option for some LPs who are looking to get some capital back to redeploy in other strategies potentially,” they said.
The prominence of secondaries as a liquidity tool is downstream of rising rates. Blackstone Strategic Partners global head Verdun Perry explained this relationship in a November Q&A with affiliate title PE Hub. He noted how pricier debt causes lower multiples on primary fund assets, thus making GPs hesitant to sell and hitting exits.
“If you’re a seller and you’re not willing to accept the lower multiple, you hold,” Perry said. “As a result, people are holding these assets longer, and that’s why you’re seeing exits and distributions decline significantly. Less exit activity. Less deal activity equates to less distributions.”