01
Highlights
Key themes in 2022
The global secondary market performed better than expected in 2022, despite highly challenging macroeconomic and geopolitical conditions. Secondary buyers reacted with a mix of opportunism, conservatism and skepticism throughout the year. A meaningful quantum of deal flow in the first half of 2022 was carried over from Q4 2021 as deals took longer to close. The second half, however, proved to be more productive than most market participants anticipated, representing approximately 50% of the full year’s activity. Several key themes highlighted an overall resilient and well-functioning market.
1
Secondary market volume hit $106 billion despite a difficult deal making environment.
While broader M&A volume was down 37%¹ year-over-year, the secondary market was only off by 21%, posting the second highest volume ever. Average transaction size trended up to $82 million from $74 million and the number of transactions closed per buyer increased to 27 deals compared to 23 in 2021. There were fewer jumbo-sized transactions in 2022, but the market was buoyed by small and mid-sized deals where sellers were more tolerant of discounts.
2
Secondary buyers demonstrated greater appetite for LP-led transactions.
A breakdown of transaction volume shows that LP-led deals were down by about 18% from 2021, whereas GP-led transaction volume was off by about 30%. After loading up on GP-led assets in 2021, secondary buyers shifted their attention to LP transactions where they were more likely to pick up assets at a discount to NAV and could add more diversified exposure to their investment programs. Secondary buyers were also acutely aware of overallocation issues in the LP community and actively sought to deliver solutions.
3
LP-led and GP-led deals exhibited significant pricing disparity.
Secondary prices for GP-led positions held up relatively well with 80% of the transactions pricing at 90% of NAV or better. This is down from 2021 where 93% of transactions priced at 90% of NAV or better. However, pricing for LP-led transactions, where there is less flexibility to curate exposure, fell more precipitously with only 38% of transactions pricing at 90% of NAV or better compared to 78% of deals generating this level of pricing in 2021.
4
Quality trumped diversification in terms of GP-led appetite.
Despite a universal sentiment from secondary buyers at the beginning of 2022 that they would be seeking more diversified exposure, single asset transactions totaled $21 billion, outpacing multi-asset GP-led deals, which in aggregate totaled about $18.5 billion for the year. Given a high level of macro uncertainty throughout the year and meaningful dislocation in terms of valuations, investors chose to participate in transactions involving only the very best assets as opposed to mixed quality multi-asset deals where the risk and reward trade-off was more difficult to balance.
5
Deferred payment structures were a key tool in bridging the gap on pricing.
Not only did more transactions include deferred payment plans in 2022, but the length of the deferral periods were also significantly extended, in some cases to as much as 36 months, in order to bridge a gap resulting from more conservative financial projections, longer expected investment horizons and lower forecasted exit valuations.
- Source: PwC Global M&A Industry Trends: 2023 Outlook
Leading global secondary market trends
The secondary market remains dynamic and buyers have adjusted to the volatile times that may persist for at least the near-term. New market constituents and innovation will continue to drive the market forward. Our outlook on the asset class is generally positive despite the headwinds. If the Fed is able to navigate a “soft landing” and public markets stabilize, we expect to see a sharp rebound in volume that may set a new high for the industry. Whether it is a 2023 or 2024 phenomenon, pent up sell-side supply is building and will inevitably lead to a flurry of activity.
1
More jumbo-sized transactions to hit the market.
We expect a significant rotation of capital into the secondary market in 2023. Approximately two-thirds of the top 20 largest secondary buyers are fundraising, many of which are experiencing a healthy pick-up in new commitments as institutional LPs weigh the benefits of the strategy over other asset classes. A healthy increase of dry powder will create more competitive pricing dynamics and lure some of the larger potential sellers back into the market to alleviate lingering portfolio management issues.
2
Increased appetite for structured secondary liquidity.
There has been a notable increase in the number of LPs that are inquiring about ways to address overallocation beyond straight secondary sales. This is partially driven by LPs’ desire to avoid selling assets at a discount, but also a greater level of sophistication around collateralized fund obligations and NAV loan structures. On the buyside of the equation, more dedicated capital is forming for secondary exposure with a credit or preferred equity like risk and return profile. These pools of capital have flexible mandates that allow them to offer liquidity against traditional LP portfolios at a cheaper hurdle return rate than what traditional equity sources of capital may seek to generate.
3
More GPs will pursue clean-up secondary trades.
Portfolio company exits will be meaningfully pushed out creating additional pressure on GPs seeking to monetize assets in older fund vintages and exacerbating allocation issues for institutional LPs. Buyers are seeking more cherry-picked portfolios at the moment, but this will change in a healthier economy where some of the prevailing risks abate. The market needs more wholistic solutions, which will allow GPs to wind up older vehicles and free up allocations to be recycled into new investment.
4
Family offices playing a more active role in the secondary market ecosystem.
Family office investors are becoming increasingly active in secondaries due to their flexible mandates. Family offices have typically been allergic to paying fees, however, net returns in certain secondary investments such as single-asset continuation funds have been enticing enough to draw them into participating in these transactions as syndicate players. We are also seeing family offices more actively seeking to offer creative financing solutions or pursuing areas of the market that other secondary players do not find attractive such as acquiring LP interests in fund of funds and energy assets.
5
GPs will become more focused on building relationships with secondary funds.
Many secondary funds have achieved a level of scale that makes them very difficult to ignore. The grey area between secondary and primary capital has been beneficial to GPs that have been able to secure capital commitments or gain access to new LPs through secondary fund relationships. This trend can only grow as the lines continue to blur between capital providers.
Annual secondary market volume¹
- As at beginning of Q1 2023
Secondary focused capital1
- As at beginning of Q1 2023
- Does not include leverage
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