A Surge in Secondary Market Deals Expected in 2024
Finex Hong Kong Limited
Private Placement and Investment Advisory, Asset Management, Fund Structuring (PI only)
As the private equity sector moves into 2024, there's a buzz around secondary deals. Building on the momentum of a dynamic 2023, the secondary market is poised for another year of substantial activity. This optimism stems from the narrowing gap in price expectations between buyers and sellers, coupled with an ongoing quest for liquidity.?
John Carter, CEO of Hollyport Capital, a London-based firm specializing in PE secondaries, reflects on this trend: "Advisors in the market have been talking to potential sellers for the last 12 months who are keen to come to market. It's just about having confidence to initiate the process, and I think that confidence is growing."?
Secondary deals have emerged as a critical strategy, mainly due to liquidity challenges for Limited Partners (LPs) in a sluggish exit environment. Excluding the second quarter of 2020, when the COVID-19 pandemic brought unprecedented challenges, the third quarter of 2023 recorded the lowest US PE exit activity in over a decade, as per data from PitchBook.?
Products such as continuation vehicles have allowed General Partners (GPs) to retain portfolio companies while offering payouts to LPs. In 2023, Blackstone successfully raised $2.7 billion for its inaugural GP-led continuation fund, while Insight Partners closed its third continuation fund at $1.3 billion.?
Despite these advancements, the market hasn't been without its challenges. A persistent disparity in pricing expectations led to a 25% year-over-year decrease in total global secondary market deals in the first half of 2023. However, deal volume remained high compared to pre-2021 levels, with investors noting a diminishing bid-ask spread later in the year.?
The Liquidity Demand Continues?
Robert Emerson, a partner at Goodwin Law Firm, predicts that the demand for liquidity will continue in 2024. This and a reduced pricing disconnect in secondary sales are expected to fuel continued deal activity in this asset class. Emerson states, "I don't see any reason why the market for next year won't be just as voluminous as this year, if not increased in size."?
Carter attributes the growing agreement on pricing to increased investor confidence in the inherent value of the assets. Concerns over inflated valuations have been prevalent since 2022. However, private market assets have seen a correction. Carter observes, "Going back 12 months, people were very nervous about valuations, and what we've seen across our portfolios over 2023 is a steady hardening of valuations. So, people have gotten more comfortable with valuations, and on the back of that, they've gotten more comfortable to trade."?
The fourth quarter of 2023 is expected to set new records in secondaries deal volume, with this momentum likely to extend into the new year. Aggressive fundraising for secondary-focused funds will further bolster the robust pipeline for 2024. In the first nine months of 2023, fundraising for these vehicles surpassed totals for every year except 2020, reaching $681 billion across 39 funds, according to PitchBook's Q3 2023 Global Private Market Fundraising report.?
Mina Pacheco Nazemi, head of diversified alternative equity at Barings, comments on the trend: "Our conversations with peers, GPs, and advisors lead us to believe there will be more secondary deal flow in the coming year as several firms have raised larger funds to be deployed in secondary transactions."?
2023 witnessed significant capital-raising activity driven by a few key players. Nearly 70% of the year's total secondary capital was amassed by four mega-funds, each closing above the $5 billion mark. In January, Blackstone set a record with its $22.2 billion Strategic Partners IX fund dedicated to aiding LPs and GPs in offloading assets in the PE secondary market.?
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Surging Interest in Secondary Markets?
A secondaries investment firm Coller Capital survey revealed that more Limited Partners (LPs) see potential in the secondary market than in traditional buyouts. Over three-quarters of the 110 investors surveyed anticipate substantial opportunities in secondary markets in the next two years. This contrasts with only 11% foreseeing similar prospects in mega-buyouts.?
Eric Foran, partner at Coller Capital, notes the evolving cashflow distribution profile in PE: "The cashflow distribution profile that many investors experienced from PE for a long time hasn't been the case for a couple of years. So, I suspect the secondary market will benefit investors in managing their portfolio's distribution profile, and that's going to be from a mix of both LP-led and GP-led secondaries."?
Foran is aware of several GP-led transactions scheduled for early 2024 and notes a pent-up demand on the LP-led side as well.? ?
Conclusion?
We can expect the secondary market in the private equity sector to experience a major upsurge in activity as the years 2024 and 2025 progress. The convergence of asset valuations that are more aligned, a boost in investor confidence, and a great deal of capital that is earmarked for secondary transactions constitute a robust base for an active period of deal-making. This positive outlook, which is the same as the forecasts and attitudes of industry veterans and investors, is a sign of the dynamic and prosperous era the secondary market will experience. This growing momentum will not only be sustained but also increase in 2025, marking an extended phase of energized and fruitful transactions in the private equity market.
Director & Head of Origination at Finex Hong Kong Limited
9 个月Lots of opportunities in secondaries