The secondaries market broke records last year and this is reflected in Secondaries Investor‘s latest survey of the market’s law firm activity.
Seventeen firms participated in the seven-question Secondaries Investor Law Firm Survey 2022. Respondents self-reported nearly $600 billion of transaction volume over the period under review, compared with $275 billion in the 2021 survey when 13 firms participated.
The survey does not paint a picture of the size of the secondaries market, as multiple law firms may work on various sides of a given secondaries deal and will each report their total deal volume attributed to the same deal. It does, however, shed light on the amount of work that law firms are advising on and the growth of the service providers who advise on secondaries processes.
After consulting several large law firms, the period under review was changed from calendar year 2021 to 1 November 2020 to 31 October 2021. Deal volume is defined as purchase price plus unfunded commitments. The survey also includes lawyers acting for GPs whose funds were sold on the secondaries market.
Akin Gump Strauss Hauer & Feld‘s year was characterised by variety, with its $24 billion of dealflow evenly split across buyout, growth and credit. It advised on 31 GP-led deals, including nine single-asset processes and 12 LP portfolio sales during the period. The firm was struck by the widespread adoption of rep and warranty insurance last year, and it expects to see a reversion back to indemnity deals as buyers look more closely at the relative cost.
“In the credit and real estate space, we expect to see a focus on the use of GP-leds to create vehicles focused on yield as opposed to opportunistic returns,” the firm added.
Clifford Chance advised on 51 deals worth a combined $22.6 billion during the period, up from $9.9 billion in the 2020 version of the survey, the last year it participated. GP-led deals accounted for 70 percent by number, with 80 percent of this falling within the private equity asset class.
In February, partner Oliver Marcuse told Secondaries Investor that there had been an uptick in sponsors running dual-track processes with an M&A- and GP-led option, with many opting for the former. “The clear advantage the M&A buyer has is the ability to move quickly – you don’t have the conflict concerns and you have quicker approvals processes,” he said.
One of the biggest year-over-year risers was Davis Polk & Wardwell. The firm advised on $12.08 billion of secondaries deals, compared with $2.5 billion in full-year 2021. Eighty percent of these were GP-led processes, with around the same proportion being in the private equity asset class. The firm also embraced the preferred equity and NAV loan markets, doing a combined $5.38 billion of deals.
Debevoise & Plimpton advised on $26.4 billion of deals in the period under review, compared with $18 billion in the whole of 2020. Seventy-eight percent of its deals by volume were GP-led, compared with 96 percent in 2020, a reminder of when pandemic-induced volatility caused a rush to more concentrated transactions. The firm closed 20 single-asset deals after the survey window closed in 2021, so expect a strong showing next year.
Another firm that did the lion’s share of its work – 65 percent – in the LP-led market was DLA Piper. The firm advised on $12.8 billion of deal volume across 160 transactions, including 13 single-asset deals totalling $1.4 billion. The firm displayed among the widest ranges in terms of the time it took for deals to close, going from as little as three weeks to as long as 18 months.
“On the LP side, transaction volume was the highest we have seen and the clear bottleneck in our LP deals was the GPs who are cracking under pressure,” a spokesperson for the firm noted. “It will be interesting to see how things equilibrate over the course of 2022.”
Gibson Dunn & Crutcher has seen deal timelines compress strongly, with the average process taking two months between launch and signing and 3.5 months from there to close. The firm advised on 38 transactions worth $14.6 billion, more than 80 percent of which were GP-led. In full-year 2020, it advised on $4.8 billion overall.
“The acceleration of the GP-led market and the infiltration across different sponsors and different strategies was beyond our expectations, even though we had seen it develop in the prior period,” said partner Edward Sopher. “At the same time, we were surprised by the lacklustre volume of traditional secondary transactions, which did not fully regain the momentum and volume of the pre-pandemic market.”
The Hogan Lovells secondaries team, led by partners Ed Harris and Adam Brown, advised on 48 secondaries deals worth $12.1 billion, up from $7.2 billion in last year’s survey. Sixty percent of its deals were GP-led, with 11 of those being single-asset transactions valued at a combined $4.71 billion. Eighteen percent of the firm’s deals were in private debt, among the highest percentages in the survey.
Kirkland & Ellis was the only firm that did not provide data corresponding to the November-October timeline, and its figures correspond to the 2021 calendar year. The firm advised on $117 billion of secondaries transactions between January and December, with 79 percent coming in the GP-led market. This included 91 GP-led deals for an aggregate of more than $50 billion, plus 10 stapled tender deals worth $6.06 billion. As affiliate title Private Equity International noted in its PEI Awards 2021 coverage in March, Kirkland represented Clearlake Capital on its ‘Icon’ series of single-asset transactions and worked on GP-led deals for Ares Management Corporation and Rothschild Five Arrows, among others.
Europe-focused Macfarlanes advised on €10.495 billion of secondaries deals in the period under review. Fully 90 percent in volume terms was accounted for by GP-led processes, 70 percent by deal number, with private equity accounting for 80 percent by asset class. The firm expects to see a general expansion of the mid-market this year. This is both in terms of sponsors running GP-led deals after seeing how the technology works at the large end of the market and buyers raising capital.
“We anticipate that there will be new entrants to the secondaries market who aim to service the smaller-size GP-led transactions that the larger secondary funds, with their minimum investment size requirements, are not prepared to service,” said partner Alex Green.
A large majority of respondents worked mainly on GP-led deals, indicative of how much the secondaries market has changed since our first survey in 2016. One of those that did not is Morgan Lewis & Bockius, which advised on $51 billion of deals, 60 percent of which were LP portfolio sales. Total volume was up considerably on the firm’s $23.6 billion recorded for full-year 2020.
“In 2021, we saw a lot of activity for LP sales, especially around large and tail-end portfolios, as well as a marked increase in the number of GP-led deals coming to market,” said partner Joe Zargari. “The start to 2022 has been similarly very active, although the macroeconomic environment has created some headwinds.”
Proskauer Rose advised on $62 billion of secondaries deal volume, compared with $46.3 billion in full-year 2020. At 38/62, its ratio of LP portfolios to GP-led deals was approximately the same as the year before. The firm worked on 25 single-asset deals worth $10 billion in value and eight preferred equity deals worth $1 billion in total value. As PEI noted in December, deals it worked on last year include a $1.14 billion process by HSBC Bank. It also acted regularly for Ardian and Strategic Partners.
Ropes & Gray worked on 290 secondaries transactions worth more than $110 billion. The firm, which does not track deal type, asset class or the average time from launch to close, names AlpInvest Partners, Coller Capital and HarbourVest Partners among the clients it represented in the period under review. Deals it worked on include the $3 billion General Atlantic fund recapitalisation, the $2.5 billion Leonard Green process and a $1.1 billion recapitalisation that it says was the first secondaries deal to use insurance that covered excluded obligations.
The rapid pace of dealmaking also made an impression on the London-based secondaries team at Stephenson Harwood – a team with just two partners – which noted that “the days of a four-month prep phase” before the process of price discovery are over. Fully 80 percent of its 29 deals were in the GP-led market and half of those were single-asset processes. It does not track its deals by volume.
“Frothy market; competitive deals; compressed timetables; stretched buyers; tired advisors; happy intermediaries; market entrants no-one has heard of… 2022 is following the same recipe but risk awareness means deals are being more widely syndicated and buyers are demanding more portfolios,” said partner Gabriel Boghossian.
Another first-time participant, Simpson Thacher & Bartlett, advised on a large proportion of preferred equity and NAV financing deals, with $7.5 billion of such deals out of $35 billion of overall transaction volume. It began the period focused more on GP-led deals and shifted to LP-led as the year progressed. Forty percent of the firm’s work was in real assets, among the highest proportions in the survey.
“As the secondaries market is ever-evolving, so too are the structures being used to effectuate these transactions,” said partner Lauren King. “We expect to see the continued specialisation of the players in the market, as well as a decrease in the share of the GP-led market held by single-asset transactions, with more market share going to multi-asset deals.”
First-time participant in the survey Travers Smith advised on $11.25 billion of secondaries deals during the period under review, 82 percent of which were GP-led and with single-asset deals accounting for $800 million. The firm also leaned into NAV lending and preferred equity, advising on 10 deals worth $1.3 billion overall.
“We are seeing and expect to see more convergence between traditional M&A transactions and GP-led single asset secondary transactions in terms of pricing mechanisms and the increasing use of W&I insurance,” the firm noted.
A first-time participant in the survey, Weil, Gotshal & Manges worked on $26 billion of deals over the survey period in the form of 34 deals. Nineteen of these were single-asset processes, accounting for $20 billion in volume terms, and included advising ICG Strategic Equity on a $2 billion process on Clearlake Capital portfolio company DigiCert. In addition to seeing existing secondaries buyers become more specialised, last year was characterised by the entry of new, non-traditional names.
“Some of [them] – particularly on the single-asset side – engaged in robust buy-side diligence that is more akin to the diligence performed by a PE sponsor in a traditional LBO,” including engaging third-party consultants, the firm noted. “These diligence exercises may include engaging third-party consultants and result in more time and effort from the portfolio company management team.”
A majority of the work done by Chicago-headquartered Winston & Strawn is representing syndicate investors in secondaries deals. Fully 80 percent of its $4 billion-worth of deal volume in the period was LP-led, with the GP-led component made up of 30 separate single-asset deals worth $562 million. The firm had advised on $2.7 billion-worth of deals in the full-year 2020 survey.
Firms including Fried Frank, Goodwin Procter, Paul Hastings, Dentons and MJ Hudson either declined to participate or did not respond in time to requests for information.
– Adam Le contributed to this report.
– This report was updated on 10 June to remove Davis Polk’s comments as they referred to 2020 deal activity.
- Article updated on 11 July to reflect Clifford Chance contribution.