Why LPs are getting the seven-year itch

There’s an interesting dynamic playing out in the secondaries market that suggests LPs’ thinking about how to manage their portfolios is evolving.

According to new data from Jefferies, the average age of fund interests sold during the first half of this year was seven years. Not only is this a drop from 8.4 years during the same period last year and down from the high of 11.3 years in 2020, it’s also the youngest average fund age for secondaries trades in more than a decade.

In other words, sellers so far this year have been more willing to part with funds they have more recently committed to than at any other point over the last 11 years.

So, was 2016 simply a dud vintage and one that LPs around the globe just happened to be keen to exit in the first half of the year? Or are there other dynamics at play?

Matt Wesley, global head of private capital advisory at Jefferies, says it’s largely being driven by buyers wanting more upside potential from younger vintages and sellers being more willing to include such fund stakes in wider sales as this can meaningfully help with optical pricing.

“Including newer funds helped to bridge some of the optics associated with the bid-ask spread,” Wesley told Secondaries Investor. In some cases, sellers hedged their bets by selling partial stakes in newer vintage funds, he added.

The notion of ‘unfunded relief’ could also be playing a part. LPs who may be approaching or at allocation limits will be wary about any unfunded commitments turning into net asset value on their books, and thus may be looking to the secondaries market to sell funds with larger proportions of unfunded commitments – ie, younger vintages. For these same LPs, selling older funds now may mean they are losing out on upside as assets in older funds are more likely to be exited when the IPO markets reopen and M&A processes pick back up.

With pricing rising by 6 percentage points year-on-year in the first six months of 2023 compared with the end of last year, as Jefferies’ report notes, it can be beneficial both from a pricing point of view and to seek unfunded relief for an LP to part with younger vintages at this point in the market, Wesley notes.

It’s worth pointing out that Jefferies’ latest figures relate to first-half trading only, and the average age of fund stakes sold for full-year 2023 may end up being older than seven years come end-December. Still, the data suggests LPs increasingly aren’t viewing the secondaries market as a place to dispose of old vintages only – and that’s a healthy development for the market.

Write to the author: adam.l@pei.group