Economic Shifts Propel GP-Led Secondaries and Continuation Funds into the Spotlight

November 06, 2023

Key Takeaways

50% of respondents view GP-led secondaries and continuation funds as growing trends related to the current economic environment

GP-led secondaries and single or multi-asset continuation funds activity continues to grow in light of fewer traditional exit opportunities, emerging as an important source of liquidity in the industry’s toolkit.
GPs should consider alternative options to traditional exit routes to drive the fundraising cycle and address the liquidity gap.

GPs are pursuing creative solutions to raise additional capital through annex funds or sidecar vehicles or making use of alternative liquidity solutions such as GP-led secondaries and continuation vehicles. 2022 was a reality check for sellers, with many unwilling to sell their assets amid the market downdraft. Depressed exit activity has consequently seen GP-led secondaries and in particular continuation vehicles become a go-to tool in sponsors’ toolkit for realizing liquidity for investors. However, there are signs that the tables are beginning to turn, sellers having recalibrated their expectations.

There was a big valuation gap last year, and that definitely has shrunk since then. There’s been a realization and acceptance among sponsors that the lofty multiples of prior years have come down a notch or two in today’s market, particularly in the U.S.” Markus Bolsinger, Co-head of Dechert’s PE practice

This is not the case across the board. Valuation gaps are still pronounced in many Asian markets.

India has been doing exceptionally well because of a confluence of factors, including its structural enablers (such as consumption growth and payment infrastructure), its broadening investor base, maturing corporate system, and more pertinently in the last year, fueled by the “China Plus One” tailwinds. Barring certain sectors like tech, where you see a lot of down rounds after some astronomical valuations, price expectations in Asia have not dropped in as considerable a fashion despite the current conditions. The message is taking its time to percolate and there’s a general sentiment among sellers that Asia’s growth story should support their valuation expectations.” Siew Kam Boon, Co-head of Dechert’s PE practice

In EMEA, respondents are more preoccupied than their peers about their ability to raise continuation vehicles, which have become a popular way for PE firms to hold onto their prized assets, bringing in follow-on capital via secondary transactions and providing a liquidity option for existing LPs. Of this cohort, 26% view their capacity to successfully achieve these GP-led secondaries as a challenge in returning capital to LPs, falling to 20% of APAC survey participants and just 13% of those based in North America.

Footnotes

The preceding article is an excerpt from the 2024 Global Private Equity Outlook report, an annual publication that uses qualitative and quantitative findings to look at current PE industry trends and views on where the market is heading in 2024.