Strong relationships with investors will be advantageous for secondary private equity managers, analysts say
The market for private equity secondaries is predicted to reach a new high as concerns about a cash shortage takes hold of investors.
According to Lazard's private capital advisory team's most recent PE secondaries report, investors are anticipated to sell holdings in private equity funds worth US$153 billion in 2023.
In comparison to 2021, when the secondaries market first surpassed the $100 billion level, the value of trades is anticipated to be 9% lower this year.
The Lazard analysis predicts that investors and private equity partners will both have a long-term demand for liquidity, or cash, which will ultimately drive the secondaries market.
In a July poll, Lazard found that investors looking to sell their holdings before the lock-up period expires will present the best opportunity.
As the value of their public portfolios decreased, many investors found themselves overweight private equity. General partners, or GPs, who are partners at private equity firms, are searching for liquidity in the secondary market since initial public offerings, a traditional method of exiting companies, are slowing.
“Looking forward, liquidity is likely to remain a key theme,” according to the report. “With traditional exits materially slowing, sponsors are expected to increasingly turn to the secondary market to deliver interim liquidity options to their LPs while also maintaining full ownership of trophy assets.”
Within the secondary market, buyout funds represent the most active segment. In the first half of 2022, buyout strategies accounted for 81% of GP-led transactions by value, according to Lazard. Investors reportedly want to invest in "established, lucrative enterprises that have proved endurance during prior downturns" because of the current economic climate.
Compared to the 12% from the first half of last year, only 6% of GP-led funding was allocated to growth and venture capital funds in the first six months of 2022.
Credit investments made up 3% of GP-led capital, while real assets made up 10%.
In the July poll, Lazard found that 66% of investors deployed more than half of their GP-led capital to these firms, indicating that investors in private equity secondaries have preferred deals with sponsors that they have previously worked with, or the so-called "core GPs."
Larger buyout funds will probably benefit from the trend more than growth equity investments, as the former have built out wider networks and more enduring ties.