The market for single-asset restructurings is heating up as secondaries buyers become increasingly willing to take concentrated bets.
The volume of GP-led deals involving exposure to single companies more than doubled to around $5 billion last year, up from around $2 billion the previous year, according to investment bank Evercore‘s YE 2019 Secondary Market report, published Tuesday.
Such deals accounted for 20 percent of GP-led volume in 2019, compared with 9 percent in 2018.
“The technology and increasing acceptance for these deals has taken off,” Nigel Dawn, head of Evercore’s private capital advisory group, told Secondaries Investor. GPs realise they can use the secondaries market to continue to control their most prized assets while at the same time providing accelerated liquidity to their LPs and deliver a win-win situation, he added.
“Historically, the secondary market has focused on portfolios of assets. There’s a transition here where concentration is increasingly embraced – and most GPs have an asset that they want to continue holding beyond the natural hold period for their funds.”
Dawn said the single-asset market could double again this year.
Total secondaries volume rose 11 percent to $80 billion last year, the third year in a row it has set a record, as active portfolio management continued to drive sales, Evercore noted. Volume has risen every year since 2016 and has almost doubled over the last five years, according to the report.
Blue-chip private equity firms including Warburg Pincus, Blackstone and PAI Partners have all run single-asset restructuring processes in the last 12 months. In November, Secondaries Investor reported that London-based Permira was seeking backers for a GP-led restructuring that centred around prized-asset Genesys.
One reason driving heightened interest in single-asset deals appears to be greater opportunity for outperformance compared with multi-asset processes. According to Evercore’s report, almost 60 percent of buyers expect single-asset deals to deliver between 1.9x and more than 2.1x on a gross basis.
At sister publication Private Equity International‘s CFOs and COOs Forum in New York last week, speakers on a secondaries panel said the biggest threat to the growth of the single-asset restructuring market was capital constraints. Some LPAs prohibit any one asset from comprising more than 5 percent of a secondaries fund, and with all conventional secondaries funds facing similar constraints, there is a natural limit to the size of a deal that can get done, panellists said.
GP-led processes overall accounted for around $26 billion last year, or 32 percent of deal volume, up from 28 percent the previous year. The majority of these deals – 85 percent – were asset-level deals, with LP tenders comprising the remainder.
Evercore’s survey found that the Asia-Pacific region grew to account for 22 percent of sellers last year. In 2018, it had accounted for just 10 percent. Deals from that region last year include Japan’s Norinchukin Bank’s sales of two portfolios, including a $5 billion bundle of private market stakes, and TPG’s stapled tender on two of its Asian funds, as Secondaries Investor has reported.
One strategy that fell in popularity last year was stapled deals. Just 33 percent of GP-led processes involved staple capital raises in 2019, down from 52 percent the previous year. This drop could be attributed to fewer managers needing to use the secondaries market to raise fresh capital, Dawn said.
“It’s partly a function of the increasing quality of GPs who are much more focused on securing accretive follow-on capital for existing assets, rather than using staple capital to invest in new platforms,” he said.
Other key takeaways from Evercore’s report include:
- Preferred equity volume rose 23 percent to $3.7 billion last year, though fewer participants offered it (21 percent in 2019 versus 31 percent in 2018).
- Younger funds are taking a larger share of the market, with five-year-old vehicles representing 46 percent of volume last year compared with almost one-third in 2018.
- LPs are more likely to sell in an asset-level deal than a tender offer process: 68 percent of LPs sold in the former compared with 29 percent in the latter.
- Dry powder is at a record high of $96 billion due to slower deployment in the second half of last year and “strong” fundraising momentum. Unspent capital is concentrated among a small number of players, with the top 12 firms managing 70 percent of total dry powder.
- Buyers are planning to raise $74 billion in capital this year.
Evercore surveyed at least 65 secondaries investors for the report, including non-traditional institutions such as public and private pension plans and sovereign wealth funds.