1 Demand will continue to outstrip supply
Until the downward cycle hits, buyer appetite to deploy capital continues to be higher than supply, putting an even greater pressure on pricing. Potential sellers are no longer driven by the need for liquidity but rather more as a portfolio management tool. This makes sellers more opportunistic and price-focused than ever before. Yet buyers continue to need to deploy capital. As such, some buyers dip even further into already low return thresholds, something they become increasingly uncomfortable with but are forced to do so to deploy. Others lower the quality threshold in search of better pricing. This may feel good in the short term but these portfolios’ performance will get tested in the upcoming cycle.
2 Leverage and structuring will creep up
Buyers who have historically resisted leverage or structuring get dragged into using it as returns come under even more pressure. The pace of evolution in this part of the market rises and people become increasingly creative. Buyers need to embrace it, as further resistance until the market shifts is futile.
3 GP-LP tension will intensify over restructurings
Fund restructurings continue their evolution. Buyers and advisors continue to grapple with ways to bring these types of deals to market without further aggravating limited partners. With the right process, right mindset and right structure, these transactions can be a very positive evolution in the market, but growing LP fatigue regarding these transactions needs to be reversed. Focusing on high quality GPs and their 2006 to 2008-vintage pre-crisis funds, that experienced a cycle early in their lives, is the key. Allowing LPs the option but not the obligation for liquidity with a status quo offering for existing LPs drives a resurgence. They become increasingly called ‘liquidity solutions’ rather than ‘fund restructurings’.
4 Deal types will continue to evolve
Secondaries transactions evolve as players seek ways to maintain historical returns. There are more (i) corporate or captive team spin-outs, and (ii) liquidity options on high quality GPs with older cycle funds requiring more time to crystallise and maximise value. Some of the more avant-garde shops open the market further.
5 If a cycle hits, all this reverses
Players return to providing liquidity for over-allocated investors. Deals become less complex, evolution stalls and secondaries goes back to its roots. Pricing declines, returns increase and leverage disappears as participants pick their spots and navigate through the turbulence.
Robard spent almost 14 years at CPPIB where he led a 15-member team investing in secondaries and co-investments globally and established its secondaries programme. He launched Whitehorse Liquidity Partners last year, which focuses on GP-led deals and preferred equity.