Secondary Market Landscape
We are now mid-way through 2023, so we caught up with Head of Secondary Investments Tom Kerr to gain his perspective on the current secondary market environment.
What is happening in the LP and GP-led markets?
One area that's probably evolved the most in our view is the deal landscape. At the end of last year we saw a lot of LPs coming to market, looking to sell, solving those liquidity issues and willing to take discounts. On the GP-led side, while that is a very big part of the market, it felt like maybe it lost some momentum last year.
Secondary Market Volume
For those of us that have been around the market for a long period of time, GP-led deals are not new. They are an evolving phenomenon and a tool within the secondary landscape to restructure funds and assets that are healthy. Historically, solving issues within funds and creating optionality within funds that were broken or had troubled assets is now part of the foundational layer of secondary markets overall. In the latter half of the last decade, we saw more GPs becoming creative around liquidity solutions and the secondary market embracing that. In 2020 and 2021 it very much became a widespread activity where GPs were recapitalizing assets, keeping assets for themselves, resetting economics and creating more optionality for LPs – but also opportunistically looking to create more value both for themselves and for LPs through this activity.
I think where we're transitioning now and what’s very exciting about this market is there's a wide acceptance of the activity by GPs and LPs. There certainly are some concerns around some of that, but it feels like it's becoming much more fluid. I think GPs are now looking at this, not as much opportunistically, but as more of a solutions provider, much more event-driven, much more situation-specific around creating optionality to solve perhaps a challenge that exists today or a challenge that might exist going forward.
For example, you have a portfolio of assets and you're out of your investment period or close to out of your investment period. Perhaps your unfunded level of commitments is not sufficient to meet the potential demand for unfunded follow-ons that you need. Perhaps you are looking to the debt markets to continue to execute your M&A strategy and now that capital is much more expensive. The secondary market may be able to come in and offer a solution to provide incremental capital to help recapitalize those businesses, to help to provide more unfunded for whatever needs there may be for that portfolio. The valuation at which that is done is less important relative to the overall capital availability. I think that is where this market is trending. It's moving away from highly opportunistic recapitalization to a more event-driven, situation-specific solution, and we think that's pretty interesting.
On the LP side, I think there is a tremendous amount of NAV in these portfolios. I think LPs would like more flexibility. I think the urgency to sell has been dampened by the public markets overall increasing as well as the fundraising markets really being slow. GPs are taking longer to raise their funds, extending their funds and giving LPs more time to do so. That urgency, the catalyst for that wave of supply to come and actually transact has continued to get kicked down the road a bit, but it feels like we're getting closer to that hitting its equilibrium and seeing that level of activity increase pretty meaningfully.
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As of July 27, 2023