Secondaries deal volume reached unprecedented heights in
2021 as fund investors rebalanced their portfolios and fund
managers tapped GP-led transactions, including single-asset deals,
as an alternative exit route. Deal activity remains robust in 2022,
even as the market keeps a close eye on regulatory and geopolitical
developments.
The private equity (PE) secondaries market delivered a blowout
year in 2021. Activity across all deal types soared, and a number
of large asset managers expanded their secondaries capabilities.
That momentum looks set to continue for the rest of 2022.
According to figures from investment bank Jefferies, secondaries
deal value for 2021 totaled a record US$132 billion, 120% up from
2020’s full-year total. This saw the market surpass the
previous all-time high of US$88 billion worth of deals posted in
2019.1
GP-led deals have moved firmly into the
mainstream
A surge in general partner (GP)-led deals-where PE fund managers
transfer existing assets into continuation funds and provide
limited partner (LP) investors with the option to cash out or roll
over their stakes-has been a key driver of this rise in
activity.
According to Jefferies, GP-led transactions grew by 94% in 2021,
year-over-year, and accounted for 52% of secondaries deals by
volume, outstripping LP portfolio sales where investors
initiate the sales of their positions in PE funds) for the second
year running.2
“GP-led deals used to be regarded as a last resort for
managers sitting on underperforming assets that they couldn’t
exit via M&A or IPO or for which they’d run out of capital
to support a business plan, but that perception has changed
completely,” says Isabel Dische, a New
York-based asset management partner at Ropes & Gray and co-lead
of the firm’s institutional investors team. “A GP-led deal
is now seen as a credible option for top-quality sponsors and
assets, offering sponsors a way to maintain exposure to an asset
they like and investors the flexibility to either retain their
exposure to a portfolio of assets or cash in their stakes if they
choose.”
Dische adds that blue-chip sponsors with high-quality portfolios
are embracing GP-led deals in greater numbers, which has led to
bigger ticket sizes, a higher volume of quality deals and more
sophisticated transactions.
“In addition to the mainstream single-fund GP-led deals, we
have noted a significant increase in single-asset deals and complex
transactions involving assets held across multiple fund
vintages,” says Dische. “These deals haven’t just
taken place in PE; we’re also seeing them in real estate and
infrastructure. The secondaries space has really broadened
out.”
K1 Investment Management’s plans to strike a US$3+ billion
GP-led deal involving up to nine assets from older funds, including
Smarsh, a provider of hosted services for archiving email, instant
messages and social media posts, is illustrative of the
market’s growing sophistication.3
Single-asset deals offer a new exit route for
GPs
The rise in single-asset GP-led deals has been particularly
noteworthy. According to Jefferies, single-asset deals accounted
for roughly half of GP-led deals during 2021.4
“A GP-led deal is now seen as a credible
option for top-quality sponsors and assets, offering sponsors a way
to maintain exposure to an asset they like and investors the
flexibility to either retain their exposure to a portfolio of
assets or cash in their stakes if they choose.”
-Isabel Dische, Asset
Management
The spike in single-asset deals in the past 12-plus months shows
how GP-led transactions have opened a new exit route for portfolio
companies. As Chau Le, a San Francisco-based PE
partner at Ropes & Gray, points out, “When preparing a
business for sale, PE sellers will look at a single-asset GP-led
deal alongside IPO and M&A options.” Notable recent
single-asset transactions include Stonepeak’s GP-led deal for
data center platform Cologix, for which it raised a US$3 billion
continuation fund.5
Le adds that it has become increasingly common for GPs to run
dual-track processes when selling portfolio companies, testing
various exit routes to find the best valuations.
In some cases, PE sponsors have opted to sell a minority stake
in a portfolio company to ascertain valuation and then use this as
the basis to set pricing for a subsequent GP-led transaction.
Warburg Pincus, for example, sold a minority stake in packaging
services company Duravant to The Carlyle Group before commencing a
GP-led deal for the asset said to be worth between US$1.5 billion
and US$2 billion.6 Clearlake, meanwhile, agreed to the
sale of a minority stake in software services company Ivanti
to TA Associates before proceeding with a GP-led secondary
transaction that attracted strong interest from multiple
secondaries houses.7
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Footnotes
1. https://www.secondariesinvestor.com/deal-volume-topped-130bn-last-year-say-jefferies-greenhill/; https://www.privateequityinternational.com/gp-led-sec-ondaries-report-2022/
2. https://www.secondariesinvestor.com/deal-volume-topped-130bn-last-year-say-jefferies-greenhill/; https://www.privateequityinternational.com/gp-led-secondaries-report-2022/
3.
https://www.buyoutsinsider.com/k1-eyes-smarsh-other-assets-in-big-gp-led-secondaries-process/#
4. https://www.privateequityinternational.com/gp-led-secondaries-report-2022/
5. www.secondariesinvestor.com/stonepeak-raises-3bn-continuation-fund-to-recapitalise-cologix
6. https://www.buyoutsinsider.com/warburg-runs-process-for-more-time-capital-with-duravant/
7. https://tinyurl.com/22v5wdrf
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