How the evolution of secondaries is shifting the lending landscape
The private equity secondary market is growing, with fundraising at a record $93.8 billion in 2023,[i] bringing liquidity to both limited partners (LPs) and general partners (GPs). Financing structures are evolving to meet the needs of this maturing market, with experience, insights and global capabilities coming to the fore.
“Today, secondaries growth is being driven by the liquidity and asset allocation goals of LPs rather than struggling portfolios or GPs looking to offload ‘zombie’ assets which may also be experiencing difficulties in gaining access to credit,” says Cassie Fisher , Director, Financial Sponsors at Lloyds Bank. “That’s a big change for the market.”
This strategic emphasis, and the broader undercapitalisation of the secondaries market, means that fundraising volumes will likely remain elevated even if M&A volumes increase and the IPO market springs back to life.
“What’s different now is that both GPs and LPs see a longer-term mainstream role for secondaries as a portfolio management tool for private equity alongside M&A and IPOs,” says Fisher.
Benefits of secondaries
A broader and deeper market
Secondaries have been transformed in the two decades Lloyds Bank has been active in the market. Traditionally, deals were LP-led, i.e. the sale of fund interests, but in more recent times, they have been joined by GP-led/direct deals, which also provide liquidity to LPs.
As much as half of all secondaries are now GP-led transactions.[ii]
“The perception of GP-led secondaries has been transformed, with single or concentrated asset continuation vehicles gaining greater credibility among LPs as they typically provide access to star assets,” says Fisher. LPs will often want to see a rollover of GP carry to ensure ongoing alignment of interests.
When it comes to pricing, LP-led secondaries have traditionally offered access to assets at a discounted price relative to historic record date fund reports. Discounts in general have tended to narrow as the market has matured. For GP-led secondaries, pricing is struck on current fair market value to ensure “best price execution” for exiting investors.
Changing terms
While terms have ebbed and flowed, Lloyds Bank has observed more dramatic shifts in recent years.
In the early stages of the secondaries’ market, loan to value (LTV) ratios were typically high, driven by a nascent secondaries market and general market sentiment; this then softened in the wake of the GFC.
However, in recent years, with a subdued M&A market and slowing distributions, many lenders took a more cautious approach. As sentiment – and public markets – are showing signs of recovery, LTVs are now returning to their long-term average of around 40-50% for high quality diversified portfolios.
This compares to a range of 5-20% for direct PE NAV transactions as a result of the lower diversity and implied manager risk.
Insights and experience are key
As the secondaries market has evolved, financing has kept pace. When Lloyds Bank first entered the market, LP-led secondaries dominated with a focus on diversified pools, LP commitments and associated co-investments.
As GP-led transactions have become a larger part of the market, Lloyds Bank has focused on supporting managers with strong track records, high quality assets and a strong underlying investor base when considering finance for higher conviction portfolios.
Lloyds Bank has holistic relationships with many of the top sponsors (of both primary and secondary strategies), giving unique market insight and enabling better-informed decision making. “As the market continues to evolve, Lloyds Bank continues to deepen its core secondaries relationships; we have built strong, through-the-cycle relationships with our clients,” says Jill Wilson , Global Head of Financial Sponsors at Lloyds Bank. Lloyds Bank’s long-term participation in the global fund finance market, across investor recourse and asset recourse lending, also enables the bank to take a hybrid view on the right transactions.
Furthermore, with over two decades of market experience, Lloyds Bank has helped shape the structures of secondary transactions adopted by the market, allowing the bank to draw on this expertise to support complex and evolving solutions.
Global secondaries and distribution capabilities
The secondaries market is now increasingly dynamic and will no doubt continue to evolve with new lenders entering the market with terms and structures changing as the macroeconomic and financing environment shifts.
For secondaries sponsors seeking banking support, deep market knowledge and insight born from experience – combined with a comprehensive product offering and capabilities – are key.
Lloyds Bank was a pioneer in secondaries private equity finance and its global capabilities have enabled it to become a leading player in the secondaries market. The bank operates as a single desk across London and New York on a pan-product (LP and NAV recourse) basis and can also draw on a strong global loan syndication and distribution capability. Crucially, Lloyds Bank has extensive relationships with bank and non-bank lenders, leveraged through our Institutional Coverage proposition, which is increasingly important in secondary financing. ?
This article is based on topics discussed during the Secondaries panel, in which Cassie Fisher participated, at the Fund Finance Association’s Annual European Fund Finance Symposium held in London in May.