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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