This article appears as part of affiliate title Private Equity International‘s March GP-led Secondaries Special Report.
Big volumes, big names
GP-led secondaries continued on their growth trajectory in 2021. Transaction volume effectively doubled year on year, according to estimates from secondaries advisers. GP-led volume rose from $35 billion in 2020 to $68 billion last year, representing more than half of total secondaries market transaction volumes, per Jefferies data.
Similarly, Evercore figures suggest a 113 percent uptick in sponsor-led deals, with these transactions making up 51 percent of 2021’s total deal volume.
Continuation funds accounted for the bulk of GP-led activity last year, as more sponsors looked to the secondaries market as a portfolio management tool and an alternative to traditional exit routes. As interest in continuation vehicles has grown, so too have the quality and range of sponsors coming to market.
At least one-third of the top 50 GPs in affiliate title Private Equity International’s ranking of the 300 biggest industry fundraisers have now made use of these vehicles, according to PEI estimates, and this trend is expected to accelerate.
“Over the next two years, all of the top 50 sponsors globally are likely to use the secondary market to deliver liquidity to their LPs and retain upside to top-performing assets,” adviser Lazard notes in its latest Sponsor-led Secondary Market Report.
Sponsor appetite for GP-led transactions has certainly piqued buy-side interest – 29 percent of buyers intend to mainly focus on these deals in 2022, up from 26 percent in 2021, per Evercore data.
A growing number of secondaries investors are launching funds targeting GP-led deals, yet concerns persist that buy-side capital is not keeping pace with supply. How buy-side capital can match the current pace and volume of dealflow is a potential impediment to the blistering growth of the GP-led market.
That being said, the latest fundraising numbers do indicate more players are stepping into secondaries – a record 77 funds held final closes last year, per data from affiliate title Secondaries Investor – and buy-side M&A activity has significantly ramped up as managers position themselves to make the most of opportunities in the market.
The single-asset surge
One of the most significant trends of the last 12 months has been the boom in single-asset transactions. These deals allow sponsors to hold on to their prized assets for longer, extending their value-creation pathway and avoiding their sale to potential competitors.
Notable deals include Clayton, Dubilier & Rice’s $4 billion single-asset process on auto glass repair and replacement business Belron, and Clearlake Capital’s $2 billion-plus single-asset deal on software company DigiCert.
The proliferation of single-asset deals has prompted the Institutional Limited Partners Association to develop guidance to help LPs better understand these processes. An ILPA spokesperson confirmed to Secondaries Investor in February that it is in the early stages of working on this guidance. It is understood to be consulting member firms. The ILPA previously issued guidance on GP-led fund restructurings in 2019.
Last year, single-asset deal growth outstripped that of multi-asset continuation funds to account for between 47percent and 52 percent of GP-led volume, according to adviser estimates. However, demand for these processes was expected to “taper” in Q1 2022 as buyers neared their concentration limits, Lazard said. This could prove to be a boon for multi-asset continuation funds, particularly as investors look for greater diversification.
When it comes to the stewardship offered by continuation funds, LP sentiment is largely positive – 66 percent of LPs surveyed for Coller Capital’s Global Private Equity Barometer: Winter 2021-22 expect these vehicles to be good owners for most of the portfolio companies that go into them. Furthermore, 57 percent believe continuation funds’ growing popularity is likely to strengthen the private markets ecosystem.
LPs have become more accustomed to these transactions as a rising number cross their desks. That raises its own issues when it comes to the time and resources required to decide whether to sell or roll into a new fund.
“Many LPs are building out this capability and, while they develop their teams and investment programmes, are looking for experienced partners to evaluate these deals with them,” says Nash Waterman, head of the AIP private markets secondaries team at Morgan Stanley Investment Management.
“A lot of large investors are very sophisticated and recognise this need, but the need has intensified so quickly that they are sometimes playing catch-up.”
As GP-led continuation funds become more commonplace, GP-led related clauses are also gradually making their way into limited partnership agreements. Although the unique nature of each GP-led deal makes it difficult to include standard terms, wider provisions, such as around conflicts of interest, could help reduce obstacles should such transactions occur further down the road.
“Strategically, I think it’s better to keep the conversation around the LPA focused on how you approach conflicts broadly, rather than on getting into the specifics of GP-leds,” says Debevoise & Plimpton partner John Rife. “You want the LPA not to prevent or stand in the way of one of these transactions, but to attempt to prescriptively describe how one would happen is difficult.”