Secondaries Digest April 2024

Are exits making a comeback and what does this mean for secondaries?

Welcome back to The PE Secondaries Digest. With Q1 data coming in over the past month, we thought now would be an opportune moment to reflect on what the numbers are showing and what the implications for the private equity secondary market may be.

The PE industry is eagerly watching for signs of a rebound in exit activity after a prolonged slowdown. The latest data from Q1 2024 presents a mixed picture, with some encouraging trends in M&A and IPOs, but also evidence that the recovery remains uneven and incomplete.

M&A value trends upwards

According to Mergermarket , the total value of global M&A increased by 15% year-on-year to $722bn in Q1, driven by a resurgence of big-ticket transactions. The comeback of leveraged loan markets as investors take on more risk is supporting this uptick.

IPO markets are also thawing, particularly in the US, Europe, the Middle East, and India, while Asia lags due to China's macro issues and a widespread stock sell-off in March. 安永 reports that in the Americas, there were 52 IPOs raising $8.4bn in Q1, up 21% and 178% respectively year-on-year.

These green shoots suggest that liquidity may finally be flowing back to private equity investors. However, a look at US private equity exit data from PitchBook paints a more sobering picture.

Total US PE exit value fell 19% quarter-over-quarter in Q1, continuing the sluggish trend from 2023. High-interest rates, limited deal activity, and a pricing gap between buyers and sellers are weighing on exit momentum.

US PE exit activity

Traditional sponsor-to-sponsor exits hit a 10-year low in Q1 (excluding the pandemic-impacted Q2 2020), as pricing gaps persist and funds hold assets for longer. Instead, many sponsors are exiting to corporates who have capital for strategic acquisitions.

A case in point, the largest US PE exit in Q1 was Leonard Green & Partners (LGP) ' $18.25bn sale of SRS Distribution Inc. to 家得宝 , the fourth biggest exit on record in this market.

And although IPOs gain a lot of media coverage and are a bellwether for investors’ risk appetite, they remain a small portion of overall PE exit liquidity.

Secondaries are here to stay

This backdrop suggests that even if M&A and IPO markets make a full recovery later this year, it won't be sufficient to clear the enormous backlog of companies currently held by PE firms. The PE industry is three times larger than a decade ago, far outpacing the capacity of traditional exit routes.

That's where secondaries come in. According to David Wachter , co-founder of W Capital Partners (recently acquired by AXA Investment Managers ), secondaries are in a secular growth phase that won't be stymied even if exit conditions begin to improve here on out. "There's no way that the IPO and M&A markets can solve the liquidity needs of the 28,000 companies that are currently held by private equity firms. Even in the best market conditions," he told PitchBook earlier this month.

While any nascent recovery in exits over the coming months would be encouraging, the secondary market has cemented its vital role and is poised for continued expansion. Given the sheer growth of private equity over the past decade, alternative liquidity solutions will be indispensable going forward.

For LPs, that means more options to manage their portfolios actively. And for the broader industry, it points to a new normal where traditional exits and secondary transactions coexist and complement each other.

Before you go:?

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