A curious market dynamic is putting strain on the single-asset continuation fund market.
Given the profile of the majority of such deals that reach the market – namely, top GPs strongly aligned to continue the growth of their star performing companies – these transactions are receiving a flurry of LPs that are looking to cash out.
Single-asset deals typically trade at par, a North America-based buyer explained. As a result, most LPs struggling with overallocation issues and liquidity demands are willing to cash out rather than roll into the new vehicle. The take up ratio for these transactions is somewhere between 92 percent and 98 percent, the buyer said.
Single-asset secondaries outpaced multi-asset continuation funds last year despite buyers suggesting they would seek diversified exposure in GP-led transactions, with deals totalling $21 billion versus $18.5 billion respectively, according to Campbell Lutyens’ 2023 Secondary Market Overview. “Quality trumps diversification,” Gerald Cooper, head of Campbell Lutyens’ secondaries advisory practice in North America, told Secondaries Investor.
The difficulty for these transactions comes in the form of buyside capital. The continuation fund market, in particular, is materially undercapitalised.
Single asset transactions boomed in 2021 following a string of landmark deals in 2019 and 2020. As a result, the opportunity set globally has expanded dramatically as the tool reached the radars of more GPs. On the flip side, many of the buyers who saw strong deployment through 2021 have been or are currently out fundraising in a crowded market.
With such a high selling volume currently, there are a number of single asset continuation fund deals that are having a hard time coming up with enough buyside capital for the number of LPs wanting to sell. In some instances, this has led to some of these deals falling over completely.
As a result, advisers are building in time to syndicate these transactions, with the list of participating buyers becoming something of a laundry list in some instances.
In some instances, flexibility is key, market participants said.
Having multiple closes on continuation fund transactions can help the process along. Differing and attractive fee and carry structures can also be built into processes to create more buyside capacity. Parties can also leave some of the asset in a GP’s selling fund – “which is not necessarily a great outcome”, one adviser said.
In some transactions, GPs can make an investment into the continuation fund transaction via a newer fund, which helps mitigate syndication risk and acts as an attractive signal for participants in the deal that the GP is truly committed to the transaction, an APAC-based buyer explained.
The secondaries market is accumulating larger pools of capital for dedicated GP-led secondaries vehicles – vehicles raised by ICG’s Strategic Equity unit, Blackstone’s Strategic Partners and Morgan Stanley have held closes on sizeable vehicles across the past 12 months – which offers a welcome shot of capital into these opportunities, but it hardly bridges the gap completely. Furthermore, majority 61 percent of respondents indicated they have no plans to invest in dedicated GP-led secondaries funds, according to affiliate title Private Equity International’s LP Perspectives 2023 Study.
The secondaries market is no stranger to innovation to get transactions over the line, but with the continuation fund boom times of 2021 in the rear-view mirror, expect a longer time out on the road even if you do have a standout opportunity.