Secondaries Digest February 2024

Welcome to this month's edition of The PE Secondaries Digest. Today, we delve into the unique characteristics of three key strategies driving private equity secondaries market activity: buyout, infrastructure, and private credit.

At a Glance?

As private markets continue to mature, secondaries are an increasingly popular way for investors to manage their portfolios. They present an attractive exit route for sellers. Divesting through a secondary sale can help investors rebalance overloaded allocations and tap liquidity to reinvest in other opportunities. For buyers, secondaries provide fast-track access to seasoned assets with more visibility compared to primary fund commitments. This allows for more informed risk-return profiling. As an increasing number of ever larger secondary funds look to put fresh capital to work, market activity is poised for further growth across buyout, infrastructure and private credit.

Buyout: Thriving in a Recovering Exit Landscape

Buyout retains its secondary market crown - representing fully 75% of transaction volume last year, per Campbell Lutyens latest report. Narrowing discounts have further stoked seller interest. Buyout funds changed hands at 91% of net asset value (NAV) on average through the end of last year, according to Jefferies latest analysis, outpricing steeper markdowns for venture capital funds.

With market conditions increasingly favorable for sellers, price-sensitive large institutional investors like pensions and endowments are actively shopping portfolios. This is why activity has skewed towards mega and middle-market funds, which constitute the lion's share of deal flow.

The bounce back in exits underpins the seller-friendly tilt. Buyout exits bottomed in Q1 last year and have been tracking up ever since. In fact, by Q3 quarterly volume was sitting around levels immediately before the pandemic. Value is also up since the nadir seen in last year’s first quarter. More realizations mean more distributions back to LPs and improved future cash flow visibility for buyers.

It’s far from a free-for-all, though. Buyers maintain selectivity around quality. Most transactions involve "cherry picking" - zeroing in on top-tier GPs and the highest-performing assets. For LPs, that translates to full bids only for their very best holdings.

Infrastructure: On the Rise & Poised for Takeoff

Infrastructure plays second fiddle for now but is striding towards closing the gap. The asset class accounted for 12% of secondary volume last year, a threefold increase over its 2022 share, per Campbell Lutyens.

Steady contractual payments over long holding periods render toll roads, airports, and utilities inflation-proof. With cash-flow yields immune to market swings, infrastructure funds trade at slim discounts - funds moved at 93% of NAV on average in the first half of last year, according to Greenhill, making infrastructure the least discounted private asset class. We expect further discount compression followed through the end of the year in line with the broader market trend.

Dedicated dry powder pipelines are surging. Pantheon just capped the largest infra-focused raise ever at $5.3bn. Consolidation amongst asset managers will undoubtedly spur more supply - Commerzbank AG , BlackRock , and General Atlantic all taking over infra fund managers last month. LPs facing GP concentration limits following such mergers will be motivated to offload stakes.

PJT Partners sees annual volume more than doubling by 2030 to $30bn (full report). Judging by the recent rash of activity, 2024 is shaping up to be another busy year.?

Credit: A Budding Secondaries Strategy?

Private credit has risen to prominence over the past two years, investors drawn by the appeal of floating-rate loans as central banks pursued tighter monetary policy to tame inflation.

Like infrastructure, it’s also having its moment in the secondaries market. In fact, despite being distinct asset classes, the two share many similarities in terms of their recent growth and pricing dynamics.?

The strategy claimed 4% of last year’s secondary volume, double its prior share in 2022, says Campbell Lutyens. This growth is being fueled by the maturation of the private credit market, which has led to an increased supply of investable assets.

Record demand among LPs for exposure to the strategy is bringing in a steady inflow of secondary capital. As much as 21% of investors surveyed by Private Debt Investor plan to commit to secondaries funds in the space this year, the highest ever reading and nearly triple the 7% seen as recently as 2022.

Firms are capitalizing on this interest in a big way. Apollo Global Management, Inc. is understood to be in the process of raising a $2bn fund, while last year Pantheon surpassed $3bn for its private credit secondaries program and Ares recently launched a business of its own.

Things are only getting started. With an estimated $1.2trn of unrealized value in private debt portfolios globally, there is little doubt the strategy will continue to claim a larger share of the pie.

Final Thoughts

As demand for liquidity and portfolio diversification continues to rise, the market is expected to demonstrate further maturation, supported by dedicated, strategy-specific pools of secondary capital. And while buyout fund deal activity commands a sizable headstart over other strategies, last year has shown that adjacent private market segments are swiftly catching up.

In the spirit of brevity, we stuck to three core asset classes in this edition of the newsletter. Next month, we'll share our thoughts on other private market strategies that have plenty of room for growth.? ?

Before you go:?

We hope this newsletter served as a handy recap of what’s been playing out in secondaries, private equity, and the wider macro context. We aim to provide you with further relevant doses of PE insights while doing what we do best: matching buyers with sellers on our secondary marketplace.

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