1.
GP-led market approaches tipping point
When the covid-19 outbreak struck in early 2020, GP-led secondaries
transactions, like many deals, were put on ice as stakeholders paused to
see how the pandemic would impact the market. GP-led transactions accounted
for just $6 billion of secondaries market volume in the first half of the
year, according to Greenhill, but this soared to $26 billion for FY 2020.
Most notably, however, Greenhill estimates that GP-led deals accounted for
a record 44 percent of overall market share last year, up from 30 percent
in 2019. Meanwhile, figures from
Evercore’s
2020 Year-End Survey
indicate GP-led deals accounted for more than half of 2020 volumes,
equivalent to more than $30 billion.
While GP-led activity has been on the rise in recent years, the market
share it captured in 2020 suggests it has become a more established tool in
sponsors’ toolboxes. This is partly due to the flexibility such
transactions can provide – giving limited partners the option of liquidity
while allowing GPs to hold on to valued assets for longer. This flexibility
has the potential to grow as stakeholders become increasingly comfortable
with GP-led transactions, deal structures evolve and sponsors become more
sophisticated in the way in which they utilise this tool.
“Driven by increased demand for liquidity from LPs, I expect GPs to become
more systematic and proactive in their use of GP-led transactions as a fund
management tool by providing liquidity options at certain stages during a
fund’s life,” Tom Kapsimalis, principal, secondaries at
CPP Investments, tells Private Equity International when asked how GP-leds might
develop over the next decade.
And as the market matures, the quality of the assets and the sponsors at
the centre of these deals rises. As Matt Jones, partner and co-head of the
secondaries team at
Pantheon, notes: “Today’s dealflow is some of the highest quality I’ve seen in 20
years in the secondaries market. Many of the deals consist of the
highest-quality GPs bringing their star companies to market – it’s the best
of the best.”
2.
Single-asset deals steal the spotlight
An extended hold on “star” assets offers an alternative to exit, enabling
sponsors to play out value creation plans over a longer period than the
traditional private equity fund life allows. This trend towards
single-asset deals accelerated in the wake of covid-19. According to
Evercore data, single-asset deals represented 43 percent of GP-led volume
last year, or $14 billion, compared with 20 percent in 2019. Greenhill’s
latest Global Secondary Market Review also suggests an increase in
single-asset continuation vehicles – representing 31 percent of GP-led
volume by deal type in 2020, up from 26 percent in 2019. The single-asset
transactions that were completed last year, the Greenhill report notes,
were predominantly in covid-resilient sectors, such as technology and
healthcare.
“There was a mantra around five years ago that you needed five to seven
assets in a continuation vehicle to diversify your risk,” says Peter
Martenson, a partner at
Eaton Partners. “But now buyers are more sophisticated in their approach to underwriting
single assets and they are finding it easier to get comfortable funding
individual companies.”
While multi-asset continuation vehicles remained the most common deal type
last year – albeit by a smaller margin – these transactions have also
become increasingly concentrated, often focusing on a small handful of
assets, again in sectors that were less prone to pandemic-related
disruption.
3.
New markets beckon
North America and Europe attract the lion’s share of GP-led activity, but
there are signs of increasing appetite for sponsor-led deals in
Asia-Pacific. In particular, momentum has been growing around
yuan-to-dollar restructurings, which can give Chinese GPs a route to list
assets overseas.
“We’re seeing quite a number of deals in China, including RMB-to-USD
restructurings,”
Axiom
principal Debbi Sutuntivorakoon tells PEI. “They’re high-quality
assets with motivated sellers and in the past year or so we’ve seen
transactions with pricing as low as 30 to 40 percent discount to [net asset
value].”
Asia-Pacific funds accounted for 6 percent of GP-led volume in 2020,
according to the Greenhill report, which notes the firm “observed increased
levels of activity in Asia-Pacific towards the end of the year”.
Sources tell PEI that there is also scope for GP-led processes to
be taken up by more sponsors in the mid- and lower-mid-market. “The
slightly smaller or medium-sized fund managers that we talk to are really
curious to learn more about those [GP-led] liquidity solutions,” says
Mill Reef Capital
partner Nico Taverna. “Fundamentally these managers have the same
challenges – they might have a great asset which needs some additional time
for the full value to be extracted or they have a fund which is reaching
the end of its fund life.”
4.
Competition heats up
As the GP-led market has grown, a number of new entrants have emerged. On
the advisory side, for example, Goldman Sachs and Jefferies are among those
entering the fray, while on the buyside Blackstone has announced it is
raising a fund targeting GP-led secondaries deals.
Increased competition may eventually result in greater manager
specialisation, as it has in the buyout market. Debevoise & Plimpton
partner John Rife says: “For new market entrants, having a niche can sell
better, and I think we’ll see that on the secondaries side as well.”
However, with more deals on the table and more players targeting the GP-led
market, competition for talent is fierce. Demand for mid-level secondaries
professionals with the sought-after skills and experience is particularly
high.
A number of mid-level professionals tell us that the volume of calls they
are receiving from recruiters has grown substantially. “We are caught in
that little sweet spot,” says one US-based secondaries firm principal. “The
last time a crisis happened returns were really good; everyone who moved to
deploy money made money and now it’s happening again. You have a chance to
move to fresh pools of capital that are really large and if the same
pattern repeats, you have the chance to take a bigger slice of an even
bigger pie.”
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