Secondaries Digest May 2024

Innovation in dealmaking: matching investors' needs and expectations

Welcome back to The PE Secondaries Digest. As the private equity secondary market continues to mature, innovative dealmaking is becoming more common as a means of accommodating investors’ needs and liquidity expectations. Several recent deals exemplify how strategic ingenuity and non-traditional structures are being implemented.

In this edition of our newsletter, we’re zooming in on three transactions that highlight the creativity and cutting-edge approaches that are being applied. As Steve Jobs once said, “Creativity is just connecting things.” And that’s precisely what’s happening in the secondaries market—capital providers are connecting with investors in need of that capital, in new and refreshing ways.

I - Blackstone's $1.1bn fund stakes sale to Ares Management

In April, Blackstone 's Strategic Partners unit completed a $1.1bn sale of private equity fund stakes to Ares Management Corporation . This deal is notable for being an example of a "tertiary" transaction, not to mention the largest PE secondary purchase ever made by Ares. The sale involved a portfolio of older fund stakes that Strategic Partners had itself previously acquired from institutional sellers.

While the market is still primarily driven by secondary funds purchasing positions from other investors, these so-called “secondary-to-secondary” transactions have become more frequent as the market has grown and matured. In light of how much secondary capital is being raised right now, we can expect to see secondary managers behind growing absolute volumes of sell-side inventory as they look to clear tail-end fund positions towards the end of their own funds’ lifecycles.

II - MLC PE's $762m indirect secondary continuation fund

StepStone Group 's involvement in a $762m deal with MLC Asset Management last month further illustrates the innovative nature of current dealmaking strategies. This transaction underscores how firms are utilizing intricate deal structures to deliver value to their clients.

This example is particularly noteworthy because it involved a continuation fund, a structure typically associated with GP-led transactions, to rehouse LP fund stakes. A brand new vehicle was set up to hold $632m of MLC's mid-market fund positions and co-investments across North America, Europe, and the UK, providing existing investors with an exit option.

The continuation fund also raised $130m of fresh capital from StepStone and others for new investments, giving MLC and its investors access to further differentiated opportunities. This was a win-win for all parties and demonstrates how existing solutions can successfully be transposed to other areas of the market.

III - Churchill and Dawson's $425m structured secondary

Earlier this month, Churchill Asset Management , a New York-based firm that has a PE fund of funds business in addition to its core direct lending operations, closed a $425m structured liquidity solution transaction with Dawson Partners .

Details on the arrangement are scarce, but what we do know is it involved a portfolio of 19 buyout fund interests. Dawson, formerly Whitehorse Liquidity Partners, is renowned for its preferred equity investing strategy. Therefore, it’s reasonable to infer that existing Churchill LPs were provided partial liquidity on their interests in exchange for taking a subordinated position on future fund distributions. And all of this was arranged by Churchill on behalf of its investors.

Such bespoke approaches are likely to become more crucial and common as investors seek customized solutions to their liquidity needs.

Expectations for the future

One of the most remarkable features of the secondary market is its ability to adapt and evolve. We believe it’s poised to take an increasingly central role in other alternative asset classes, such as real estate, infrastructure, and private credit, as investors look for opportunities to access liquidity across their entire portfolios.

What’s more, recent market developments suggest we can expect to see continued advancements in deal structures. For example, funds of funds launching continuation vehicles and manager-led mass preferred equity sales will surely account for a growing share of deal volume going forward.

We’re excited to see what’s next.

Before you go:

We hope this newsletter served as a handy recap of what’s been playing out in secondaries, private equity, and in the wider macro context. Palico aims to provide you with further relevant doses of PE insights while doing what we do best: matching buyers with sellers on our secondary marketplace. If you are active or curious about the secondary market, we invite you to register for our email newsletter where you can see deal flow on our marketplace.

Do you want to get in touch directly to talk about how we can help you sell your fund stakes digitally? Contact our team: [email protected]

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