The vast majority of limited partners are opting to sell when continuation funds are being put to them as they look for liquidity in a cash-strapped environment.
Limited partners sold approximately 90 percent of the time in continuation fund transactions during the first half, a “significant increase” on prior periods, according to estimates from Lazard.
This is driven by a combination of record deployment and slower exit activity, the secondaries adviser noted in its sponsor-led secondary market first half review. US and European private equity deal volumes in the first half were already at around 51 percent of 2021’s total. Exit values, however, were at 25 percent of 2021’s full year totals across both regions.
“While this potential ‘liquidity squeeze’ might not be felt immediately by LPs (given the use of fund financing facilities), it is still likely that cashflows from PE will be negative in 2022 for only the third time in the last 12 years,” Lazard noted.
That such a large number of LPs are opting to sell rather than roll is “pretty phenomenal”, Nadira Huda, a managing director within the European Private Capital Advisory group told Secondaries Investor.
“You’ve effectively got LPs looking for ways to generate that additional liquidity to perhaps redeploy into much of the primary fundraising they’re seeing. [Given] the fact that distributions have not quite dried up, but are not anywhere near the record volumes that we saw in 2021, there is this immediate need for capital that I think is manifesting itself in GP-led transactions,” Huda added.
GP-led transactions made up 47 percent of overall secondaries dealflow in the first half, compared with a 61 percent market share across the same period in 2021, according to the report. A total of $59 billion was deployed across all secondaries transactions in H1, up 23 percent compared with the first six months of last year.
Activity ramped up in the second half of 2021 to bring total deployment in the secondaries market to $126 billion, by Lazard’s estimate.
Second-quarter valuations in Europe are looking at this stage to be relatively consistent with the first, which continues to fuel a bid-ask spread as buyers expect steeper discounts to reflect the decline of public markets. As a result, there could be a flight to high-quality assets in resilient sectors where agreement on pricing is clear.
In Europe, Lazard has had a 100 percent success rate for GP-led transactions it has advised on in the first half, Huda said, but the bar is “exceptionally high” for these transactions, particularly single-asset transfers.
The road to another record
Beyond 2022, the outlook is increasingly optimistic for secondaries. Although respondents surveyed by Lazard expect 2022 volumes to sit below 2021’s heights – with the mid-point estimate being around $115 billion – the majority believe 2023 will be a record year. The average figure respondents expect to be deployed was $153 billion, while conservative estimates placed that figure at $130 billion.
The survey included responses from buyers accounting for more than 80 percent of secondary market capital, a spokesperson for Lazard said.
Approximately 70 percent of the largest firms by historical capital raised are currently out in market with new funds with five secondaries investors targeting more than $10 billion. Lazard estimates over $125 billion will be raised for private equity secondaries in 2022, in line with last year’s figures. “That will drive a lot of the dealmaking behaviour as that pressure to deploy really builds into the first half of next year,” Huda said.