The secondary market has grown quickly from a niche marketplace to an important portfolio management tool for private market investors looking to proactively balance their programs. Utilizing the secondary market has become a common and effective solution for LPs to achieve their overall portfolio goals. In just two decades, total secondary market volume has grown from approximately $2 billion to approximately $120 billion, led most recently by the surge in demand for GP-led transactions.1
After a strong seven-year growth run, pricing fell in 2022 for all private equity strategies, keeping many prospective sellers on the sidelines. Over the course of 2023, the market rebounded and secondary pricing improved, drawing both sellers and buyers back to the arena.
Motivations for Selling
LPs have varied reasons for pursuing a secondary sale, including levelling out overallocations, rebalancing portfolios, divesting non-core relationships, winding down legacy positions, or managing liquidity needs more generally.
In the current economic climate, with elevated interest rates here to stay, investors are often seeking to sell due to overallocations rather than because of liquidity constraints. Most of the sellers we are working with are focused on three core objectives – 1) streamlining legacy portfolio positions, which in turn lessens the overall administrative burden; 2) reducing NAV in their private markets portfolios to meet allocation targets; and/or 3) freeing up capital to re-invest in new funds.
As the market continues to evolve and secondary transactions get more complex, so too do the factors that should be assessed before selling. In the process of working with clients to identify their optimal sales strategies, our first objective is to simplify what can be an overwhelming process. We do this by anchoring them around the two factors that will likely have the most influence on their future success: pricing and finding the right advisor to serve as a long-term partner.
1. Pricing, pricing, pricing
As with any investment or divestment, the ‘X’ factor is pricing. The underlying dynamics that drive valuations across the secondary market are broad and unique and can involve multiple dependencies, including portfolio mix (strategy/sectors/geographies), funding levels, and the quality of underlying assets (including both the GP and portfolio companies). We generally discourage clients from attempting to market-time potential secondary sales and reinforce that a rushed sales process can often have a negative effect on pricing.
2. Take Time to Find the Right Partner for You
Most LP sales are executed through brokers, and there is considerable long-term value in finding and building relationships with advisors that can do more than just provide transaction execution. An experienced partner with broad and deep expertise can help ensure a more competitive sales process (which in turn should drive more favorable pricing), as well as a tailored solution to meet each client’s specific investment goals.
Some of the key areas where advisors can bring additional value include:
- Providing objective, conflict-free guidance on the optimal asset mix to maximize pricing and achieve portfolio goals
- Integrating quantitative risk factors into decision-making
- Assisting with legacy asset and cash flow management
- Providing custom solutions for specific needs
- Analyzing the broad range of secondary structuring options available (including mosaic sales, SPVs, and hybrid solutions)
We see the positive momentum in the private equity secondaries market continuing through 2024, providing investors with ample opportunities to find good deals. Pricing continues to improve as valuations rationalize and bid-ask spreads narrow, and we are seeing brand name, developed market buyout funds trading at around 90%+ of NAV.2 There is also plenty of dry powder, ranging from well known, multi-billion-dollar secondary funds, to smaller, newer secondaries firms and non-traditional buyers seeking to acquire positions opportunistically. While it is impossible to predict future market pricing for LP secondaries, many of the key fundamentals are in place now and pricing is on the upswing. If you have been considering selling, 2024 might be a sweet spot.
1 Lazard, Private Capital Advisory Secondary Market Overview, 2023
2 Guideline only; dependent on GP, how drawn, underlying sector exposure, etc.