The Current Secondary Market Backdrop
While we continue to see a tremendous amount of deal flow in the secondary market, the deal completion rate slowed in Q2 2022 as the market paused to digest volatility and lower pricing. Deal flow is expected to remain strong, as seeking liquidity and capital via the secondary market will continue to be priority for both LPs and GPs in the current environment. For LPs in particular, the challenge will be determining what pricing they are willing to accept in order to solve their increasing over-allocation issues. What was an opportunistic exercise in recent years is set to become more tactical and need-based.
With broad market acceptance continuing to drive secondary supply growth, the secondary market has never been more undercapitalized than it is today. Currently, there is only around $100-$125 billion1 of dry powder, which is less than 2021 transaction volume and still just a small fraction of the $6+ trillion of NAV in the private markets. There is a tremendous amount of potential secondary opportunity relative to the capital available to execute on those opportunities. This dynamic is creating an attractive opportunity from a buying perspective.
LP Interest Pricing
Pricing has declined across the board since the beginning of the year, with most deals still pricing off of year-end NAVs (or March 2022 NAVs, which were broadly similar to year-end). The quick decline in pricing, along with increasing buyer caution, has caused LP deal activity in the secondary market to temporarily slow down. However, there is a strong backlog of motivated LPs bringing portfolios to market in the second half of 2022 and we anticipate volumes increasing as buyers and sellers gain visibility into second quarter valuations and performance. To the extent June valuations come down to account for the current environment, optical discounts could be palatable, further supporting deal activity in the second half.
Transaction Landscape – Macro Impacts
1 Source: Evercore 2021 YE Survey Results
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