Valuation certainty and surge in dry powder drives pricing higher – Campbell Lutyens

There have already been some notable improvements in LP-led pricing in Q3 this year, according to a buyer survey from the advisory firm, shared with Secondaries Investor.

Certainty around valuations and an increased amount of dry powder have allowed buyers to be more aggressive in bids so far this year.

LP-led pricing dipped in the first half compared with full year 2022 figures, according to a buyer survey flash update from Campbell Lutyens shared with Secondaries Investor. Just over one quarter of transactions priced at a 10 percent discount to net asset value or better in the first half, compared with 38 percent last year.

Pricing was still depressed in the first half as buyers viewed valuations as being too high, with discounts seen in the fourth quarter of last year carrying over to Q1, Gerald Cooper, head of Campbell Lutyens’ secondary advisory practice in North America, told Secondaries Investor.

Across the first and second quarters, GPs continued to mark up their portfolios.

“This creates a positive dynamic for secondaries buyers, because last year, the big fear was that private markets would reset and valuations would drop by 10 percent to 15 percent,” Cooper said. “Now we’re seeing GPs mark up their portfolios, and those fears of reset valuation are no longer there. You’re now, as a secondary buyer, buying assets in a market where the valuations are going up, which allows them to pay a higher optical price.”

This is coupled with buyers having accumulated large amounts of dry powder for secondaries. A number of large fund closes in the first half increased dry powder by 23 percent on year-end 2022 figures, according to Campbell Lutyens’ report, with a further $77 billion planned to be raised over the next 18 months.

“Funds are larger than the predecessors and the clock is ticking,” Cooper added.

Strong GPs with strong assets are now commanding pricing in the 90s as a percentage of NAV – a level Cooper said has not been seen in the past four quarters. Underperforming GPs or sponsors with mixed track records and assets where the investment thesis is not quite as straightforward are still pricing in the 80s, which creates an average price for LP portfolios that remains in the mid-teens range compared with 80-85 percent of NAV last year.

Valuation is key for GP-leds

While buyers focused on backing the best managers with the best assets in 2021 and 2022 – a trend that remains – the market has become increasingly focused on valuation, Cooper said.

“Valuation at this point, along with alignment, is probably one of the most important dynamics or variables in getting a GP-led transaction over the line,” he said.

GP-leds saw a wider dispersion in pricing in the first half compared with 2022, which was driven by a combination of factors. Some transactions involved “high quality assets marked at conservative valuations”, which allowed buyers to pay close to par, the flash update noted. There was also more flexibility to price below par given that there are lower closing rates on GP-led transactions.

More transactions are pricing at a discount because of heightened sensitivity from buyers around valuation, Cooper said.

“They’ve been able to buy assets at discounts because you have found this strong desire for liquidity, both driven by LPs wanting to supplement the liquidity that they’re not getting from regular way M&A and GPs that are keen to improve DPI.”

Given the strong performance of underlying assets, trades can happen at a discount to the prevailing NAV while still crystallising attractive returns for LP, he added.