Secondaries in 2021: Five things you might have missed

The 2021 annual reports from secondaries advisers have been more detailed and covered more angles than ever before, with more publications likely to come in March. Here are a few findings that go beyond the headline figures.

Funds subject to GP-leds got dramatically younger

Fifty-eight percent of funds to undergo a GP-led deal in 2021 were between one and six years old, compared with 39 percent in last year’s survey, according to Evercore. The most frequent age range was three to six years in 2021, compared with six to nine years in 2020.

This is closely linked to the rise of single-asset deals, which are less likely to be thought of as end-of-life fund processes, Evercore senior managing director Nigel Dawn told Secondaries Investor.

Single-asset deals accounted for 23 percent of all secondaries transaction volumes and around half of GP-led volumes, equivalent to $30 billon, according to Evercore. Single-asset volume was $14 billion in last year’s report.

Mosaic deals at a six-year low

Mosaic transactions – in which several buyers acquire subsets of a portfolio – declined in frequency last year, having hit a historic high the year before.

They accounted for just under 21 percent of the LP deals that Greenhill worked on in 2021, around half of the 2020 level, when volatility in valuations caused buyers to reject diversified portfolios in favour of targeted subsets.

Greenhill observed “very aggressive bidding behaviour from large buyers” on newer, high-quality assets, “largely driven by portfolio construction rebalancing considerations”, the adviser said. The spread between high and low bids sometimes exceeded 20 percent as buyers bid with conviction on assets they knew well.

Convergence in continuation fund terms

Terms for continuation funds became more uniform in 2021, as did the consensus around which companies make a good “fit” for the technology, according to Jefferies. A five-year vehicle with two one-year extensions is becoming standard, “reflective of the expected hold period of a portfolio company underwritten in an LBO”, the adviser concluded.

The “back-ended cashflow” of continuation fund deals is leading buyers to pay more attention to portfolio construction, Greenhill said: “We have observed strong interest from larger buyers for more mature fund portfolios with a near-term liquidity profile to help rebalance their overall portfolio DPI ratio.”

Largest buyers increased their share

Large buyers – those that deployed more than $1 billion in 2021 – accounted for just under 81 percent of secondaries transaction volumes in 2021, up from 67 percent in 2021, according to research from Setter Capital.

This increase resulted in the middle losing out. Firms that invested between $100 million and $1 billion last year saw their proportion of dealflow as a total of the market decline by more than 10 percentage points.

Most see secondaries volumes of $200bn by 2025

More than 80 percent of respondents to Lazard‘s survey estimated secondaries deals volumes of $101 billion to $150 billion this year. Some were more optimistic, with 2 percent of respondents picking $201 billion to $300 billion and 4 percent expecting volumes to drop below $100 billion. The consensus for 2025 is that deal volume will land in the $201 billion to $300 billion range, a 4x increase on 2017.