GP-Led Secondaries Are Going Mainstream. Here’s Why.

Secondaries run by general practitioners are in demand and entering the mainstream.

As the end of the year approaches, 62 percent of respondents to a survey of 64 global investors say they plan to increase their allocations to GP-led secondary transactions in the coming months, according to Eaton Partners, a Stifel company. . In these transactions, private equity firms take a portfolio company or other investments out of a fund, compensate investors, and form a new one.

Peter Martenson, managing director and global head of GP direct, secondary and advisory services at Eaton Partners, said private equity firms are increasingly doing these deals because exiting their investments has become more difficult amid the market downturn.

Initial public offerings have slowed sharply, with volumes falling 46 per cent and profits falling 58 per cent year over year, according to EY. In a context of rising inflation and rising interest rates, mergers and acquisitions fared no better. According to PwC, transaction values ​​decreased by 20% from the first half of 2021 to 2022, and mega deals, those over $5 billion, decreased by about 40% from the second half of 2021 to the first half of 2022.

Nearly half (42 percent) of investors who responded to the survey said they are now allocating at least half of their capital invested in current funds for GP-led transactions. As these types of transactions have become more common, investors seem to have jumped on the idea. “People rinse and repeat and do more of them,” Martenson said. Institutional investor. “We are getting to this tipping point where people feel comfortable. GPs are bringing more to market and LPs are embracing them.”

These deals can make intuitive sense and highlight one of the problems with private equity: Funds have finite lives, and backers ultimately have to come out of even the best investments. This type of high school offers an alternative.

More than half of those surveyed said they expect to invest between $100 million and $500 million in GP-led secondary recap transactions in the second half of 2022. Eleven percent said $500 million to $1 billion, while only 3 percent said $1 billion or more.

In the second half of 2022, respondents said they are looking for buyout, growth capital, and venture capital-oriented companies, which tend to be concentrated in the technology, healthcare, service, and industrial sectors.

But the GP-led transactions still pose concerns and challenges for investors. When asked what top issues they anticipate when underwriting their trades in the second half of the year, respondents cited funds with overly optimistic net asset values, inflation and recession resistance of underlying investments, lackluster companies, and private equity. new or unknown. companies In fact, more than 90 percent of those surveyed said it would take another quarter or more for NAVs to reflect losses in the public markets.

Martenson said that with a GP-led secondary transaction, an investor is underwriting two elements: the portfolio company in the fund and the sponsor or private equity firm. Investors have to think about whether or not the company is well-equipped to navigate market volatility, rising interest rates and an impending recession. If not, the LP is likely to lose money, he said.

When it comes to a GP, reputation is also very important to investors. If a manager is unknown, an LP may be less inclined to trust him with a new type of transaction. Martenson said that despite these concerns, the GP-led secondary market is “a good investment theme” and poised for continued growth.

Leave a Comment