The secondaries market has rebounded fully from a pandemic-hindered 2020, according to research by Jefferies.
There was $48 billion of secondaries transactions in the first half of this year, $6 billion more than the previous record first half of 2019, according to the investment bank’s Global Secondary Market Review. Here are some key findings.
GP-leds cement their majority position
Fully 60 percent of dealflow in the first half was in the form of GP-led deals, a 383 percent increase on the same period of last year in volume terms. Of these, approximately 45 percent were single-asset deals, up from around 30 percent last year. Continuation fund deals have grown to become the dominant form of GP-led processes, accounting for 85 percent of volumes in the first half.
“We are witnessing a ‘new normal,'” Jefferies concluded. “GPs continue to creatively unlock value by accessing follow-on capital and identifying and holding trophy assets for growth and expansion.”
LP portfolios make welcome return
LP sales also rebounded strongly in the first half, with the volume of portfolio deals growing 58 percent compared with the first half of last year, when the pandemic put the market on hold. This increase was driven by 10 deals of more than $500 million in size, five of which were worth more than $1 billion.
Appetite for diversified deals was strong as buyers began to reach their concentration limits by tapping the GP-led side of the market. LP portfolios received interest from around 30 percent of buyers contacted by Jefferies, leading to an estimated close rate of 80 percent for all LP-led deals brought to market, it concluded.
Pricing rebounded strongly across asset classes
The average high for all strategies in the first half was 90 percent of net asset value, 4 percentage points up on the end of 2020, Jefferies noted. This was partly driven by the rally in public markets, which meant “aggressive pricing” was needed to cover the bid-ask spread.
The weighted average vintage of all funds sold in the first half was 2013. Funds of vintage 2016 or later priced at 96 percent of NAV on average, while North American and European buyout funds of that vintage priced at a premium – 101 percent of NAV, on average. Tail-end funds, those of 2009 vintage or older, also priced well at 85 percent of NAV on average.
This trend signals a “shift from pandemic-driven buyer sentiment”, where buyers frequently “paid higher prices for funds with significant unfunded capital and punitively discounted tail-end portfolios”, Jefferies concluded.
Assets involved in GP-led processes during the first half had been held for an average of six years, with certain single-asset transactions carried out after two to four years.
Capital overhang reduced
There is $231 billion of near-term available capital in the secondaries market, compared with $188 billion at the end of last year. At the same time, transaction volumes in the trailing 12 months were up $30 billion compared with the period before, leading to a reduction in the capital overhang from 3.1x to 2.6x.
“Second-half volume is anticipated to eclipse the first half once again as demand remains high for diversified LP portfolios and quality GP-led opportunities,” Jefferies noted. “We believe the capital overhang multiple will continue to decrease in H2 given robust secondary activity.”