Could the sky be the limit?

We are seeing that managers are simply calling more capital than they are giving back, in part because they recognize that they have to start putting all the capital they have raised to work as investment periods continue to tick by.

Jochen Mende, Head of Secondaries 

The secondaries industry is on fire. While a rebound in public markets has, to some extent, alleviated the impact of the denominator effect, a pervasive lack of liquidity continues to drive dealflow across both LP- and GP-led strategies.

At the same time, secondaries as an asset class is chronically undercapitalized. This supply/demand dynamic is creating a truly compelling buying opportunity.

“The need for liquidity, the lack of DPI, the number of investors that are overallocated and the modest amount of dry powder that is available in the secondaries market relative to annual deal volumes – [this all means it] remains more of a buyer’s market,” says Ben Perl, managing director and global co-head of secondaries at Neuberger Berman, speaking on Private Equity International’s annual secondaries roundtable.

“No matter how much money secondaries funds have raised, we still have no more than a year and half’s worth of dry powder,” adds Miguel Echenique, a partner at AltamarCAM Partners. “There is far more demand than supply given the lack of liquidity that investors are facing.”

Indeed, M&A volumes were down by 70 percent in 2023 compared with 2021, according to Yann Robard, managing partner at Dawson Partners (formerly Whitehorse Liquidity Partners). “There were as many IPOs in the fourth quarter of 2021 alone as there were across all of 2022 and 2023,” he says. “That is how little liquidity there has been in the market.”

“We are seeing that managers are simply calling more capital than they are giving back, in part because they recognize that they have to start putting all the capital they have raised to work as investment periods continue to tick by,” adds Jochen Mende, executive director and head of secondaries at UBS Asset Management.

Meanwhile, the fact that public markets have experienced a revival has supported secondaries dealflow, rather than dampening it. While overallocation issues are less severe, the impact on valuations – when coupled with greater stability in the macro environment – is making it easier for buyers and sellers to come together on price.

“The market is starting to feel more balanced,” says Gavin Anderson, a partner at Debevoise & Plimpton. “The bid-ask spread is less acute, and the LP-led portfolios sale market is active. Both buyers and sellers are there.”

“Back in 2022, we were faced with the prospect of hyperinflation,” adds Robard. “We didn’t know where interest rates were heading. There was a lot of confusion in the market, all of which led to higher optical discounts that impacted LPs’ willingness to sell. Today, those optical discounts have narrowed. Public markets are up 20 percent and private equity valuations have yet to catch up, meaning pricing is generally back in the 90s for quality portfolios and many LPs are more willing to transact.”