We have entered secondaries’ ‘decade of capitalisation’

Secondaries heavyweights descended on Orlando, Florida, last week for PEI Group’s NEXUS summit. Key to those discussions was: where to from here?

Two key reports laid out strong performance credentials for the sub-asset class at a time when secondaries fund sizes are swelling, but many lament the undercapitalisation of the market versus the opportunity that’s out there.

On the long-awaited topic of performance data for single-asset continuation funds, a study by Evercore and the HEC School of Management in Paris shows such vehicles provide more consistency in returns than buyout funds and similar performance.

In further good news for secondaries professionals, Bain & Co’s Global Private Equity Report, out this week, found secondaries was the only alternative asset class in which even bottom quartile of funds deliver a positive return.

In an interview with Secondaries Investor’s Adam Le, Whitehorse Liquidity Partners founder and managing partner Yann Robard detailed three milestones for the asset class.

Between 2001 and 2011, LP-led transactions dominated the secondaries market, followed by a decade of innovation through to 2021, Robard said. During that decade, the market jumped from $25 billion of deal volume in 2011, to $125 billion in 2021.

“Think about everything that has happened in the secondary market over the last 10 years. It’s pretty phenomenal when you start listing it out,” Robard said, rolling off LP secondaries, multi-asset funds, single-asset funds, credit, infrastructure and real estate secondaries, preferred equity, NAV lending and GP stakes (where the lines are blurring with the secondaries market “so let’s just add that [in]”).

“That’s a long list of innovation that has happened in a very short period of time in the secondary market, all with a theory of: can you inject liquidity in an otherwise illiquid asset class?” he added.

Robard expects the next decade – from 2021 through to 2031 – to be remembered as a time of capitalisation for the secondaries market. Using the assumption of five times growth seen across preceding decades, fundraising from institutional investors will reach $500 billion by 2031, up from $100 billion seen in 2021, Robard says. The second half of the equation – to reach the $1 trillion-mark Robard has long forecast – comes from the private wealth opportunity as more capital flows into private markets, he adds.

While LPs continue to tap the secondaries market for regular portfolio management – a trend that is expected to continue and accelerate in the near term – the GP-led market will be spurred on in part by the emergence of buyout shops putting their chips on the table. They will be launching secondaries funds to take part in a growing market that is, in part, cannibalising some of the natural dealflow that would have otherwise come to them.

Leonard Green, Accel KKR and Astorg are among recent entrants in the space. Those participants coming to market in future, together with crystalised performance from continuation funds, will help unlock further capital for GP-led transactions, Nigel Dawn, global head of Evercore’s private capital advisory group, told conference-goers.

There are probably a further 10 or 20 firms that are likely to enter the secondaries market in the next 12-24 months in some fashion, Dawn said. When these new groups enter the market, many of which he believes will position themselves as a lead investor, their own investors and co-investors are likely to follow.

“I think over time its impact could be fairly significant, and I wouldn’t be surprised if in five years’ time the secondary market looks radically different than it does today,” Dawn added.

Although there are naysayers to Robard’s $1 trillion prediction for the secondaries market, there is no question that the industry’s growth spurt is far from over.

– Hannah Zhang contributed to this Friday Letter