Off the back of a frantic year for secondaries transaction volumes – by some estimates, deal volume hit more than $130 billion last year – secondaries investors have pulled back on capital deployment as they assess an uncertain market.
Gerald Cooper, head of Campbell Lutyens‘ secondary advisory practice in North America, and Immanuel Rubin, head of European secondaries, speak to Secondaries Investor about their overview of the secondaries market and what we should expect to see in the second half.
What are some of the key trends you’re witnessing at the halfway point of the year?
Immanuel Rubin: Let’s talk global. It’s a global market. The thing about a secondary fund [is it] can invest in the US, in Europe, or Asia, and it doesn’t necessarily need to do one over the other.
We obviously had a fantastic year, all of us, in 2021 and in the first quarter of 2022, with quite a few things still… getting done, which is sort of a hangover from the previous year. There were some big LP portfolio trades initially in Q1 as well.
And then I’d say a number of things came together, which… really slowed the market down in Q2 – obviously partially driven by what’s gone on macroeconomically, but it’s been also partially driven by the fundraising environment for the secondary funds [and the] fundraising environment generally.
Gerald Cooper: I think the GP-led activity is going to continue to rise. I think we may be flat in terms of GP-led activity to last year or slightly down, just given there has been a little bit of a pause in the market due to the volatility in public markets, inflation and the threat of recession. So investors have pulled back a little bit in terms of deploying capital, and maybe you’re deploying capital a bit slower, so we’ll see that in kind of decreased transaction volumes.
However, I think the long-term trajectory for GP-led transactions is very positive… If we think about 2021 as being kind of $60 billion in terms of GP-led transactions and continuation funds, certainly we could be double that in the next three years. The biggest hurdle that we face in terms of growth is capital formation, so [we need] more money coming into this asset class in order to prosecute all of the opportunity that’s available.
Are we seeing further innovation of the use of continuation funds?
IR: Looking at single-asset continuation funds first, I think there you may start to see innovation somewhat, because [in] the market itself there isn’t as much liquidity out there that is needed to satisfy the flow of opportunities coming. That’s driven by secondary funds, basically.
The vast majority of [firms], when they do [continuation funds], they do very small tickets from an asset [or] portfolio construction perspective. There are some bespoke programmes – so, like the Morgan Stanleys of this world, the ICGs – but there are limits as to how much capital is truly out there relative to the supply. I think the jury is a little bit out as to how this can get resolved.
One way is that these trades, particularly the ones that are externally priced, could become actually more [like] fundraising exercises, which could go directly to the LP community rather than secondary funds. We’ve seen some direct GP managers looking at solutions themselves that they can just raise [let’s call it] ‘standby capital’ to do these in the future [and] have sort of opportunistic funds that can do these.
Otherwise, there’s going to be a lot of structured trades, probably again because of that valuation mismatch – the valuations of GP or their portfolios relative to where public markets have traded. How do you bridge some of this if you see the huge drops in venture portfolios? [It] could result in structured transactions.
What is the state of play on pricing in the secondary market? Given we’ve now seen the back of the first half, do you expect more clarity following Q2 mark to markets?
GC: Pricing for good assets can still generate pretty narrow discounts to par. I would say for assets that have any sort of story attached to them, or assets that are more tail ends, or longer dated, that’s where we’ve seen pricing widen the most, because M&A activity has slowed.
Those tail-end assets in any portfolio are usually the ones that have been tough to sell – and in a market where there’s a lack of liquidity, you’re probably looking at those exits being pushed out.
If you could have gotten a 15 percent discount on a tail-end portfolio previously, now you’re probably looking at a 25 percent discount… There are assets that would have traded at a premium prior to the market volatility. Those assets may be trading at low single-digit discount to par.
So there’s definitely been some price degradation, but it’s been more acute in assets that haven’t really performed well, or GPs that have maybe more volatile track records… I think in every downturn you see a flight to quality, and so a buyer may be willing to take a lower return on a quality asset as opposed to taking a higher return on an asset where they may have less confidence or lower comfort level.
RI: The one thing about the GP-led market is that you’ve got a single asset and you can mark to market properly. Once you get to multi-asset continuation funds it gets trickier and trickier against the different mark.
If you had a multi-asset continuation fund a year ago, you had to be pretty close to par to get something done. Today, I think LPs are willing to take larger discounts as well because they’re realistic that some of these [valuations] are not necessarily there. And as long as the rationale is strong [about] why the trade should happen, they’re more willing to accept it as well. Now, if you’re a GP, do you want to do this? That’s a different question.