A rush of PE secondary market activity is brewing amid fraught exit outlook

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A rush of PE secondary market activity is brewing amid fraught exit outlook Dry spells are showing in various asset classes as investors seek refuge in cash and decide how best to balance their portfolios as they digest the macro outlook. Private equity is no exception in this pursuit of liquidity. PE fundraising is on course for a drier patch, weighted down by a slower exit market. The latest Rede Liquidity Index offers a view into this. The RLI score for H2 2022 fell 13 points to 41, a record low, indicating that LPs on average expect to reduce commitments to new funds over the next 12 months. The main reason for this is the lack of cash flowing back to investors. As much as 84% of the 115 LPs surveyed for the report expect less capital distributions over the next year and this is the main reason for them dialling back their primary fund deployment plans. It\’s not going to be the easiest fundraising calendar for a lot of managers. However, things appear to be building towards a bustling PE secondary market. Activity has already been remarkably robust this year in spite of volatility in equity markets. Various estimates put H1 2022 deal value above $50bn, topping the same period last year, and many are expecting the all-important $100bn threshold to be crossed. A recent report from Montana Capital Partners indicates that 25% of institutional investors expect to sell PE positions over the year ahead. Even though that\’s only a minority, it\’s still a sizeable share of the LP universe. Private capital assets under management were estimated to total $9.3trn as at the end of 2021, putting more than $2.3trn up for potential review. (Obviously only a fraction of these assets will come to market). All of this aligns with what we have been seeing here at Palico. There have been more inbound requests and expressions of interest in our secondaries platform than ever. Not all deals are closing yet and in many cases bid-ask spreads remain too wide. Stock markets are inherently forward-looking and private markets are renowned for lagging. The bear market has largely been in anticipation of an economic slowdown and the impact that tightening monetary conditions will have on company performance. Secondary buyers want to see more visibility on what operating performance will look like in 2023 before leaning heavily into deals. And GPs have to date have largely been conservative with their markdowns. With greater clarity on how underlying portfolio companies are performing and what the macro slowdown actually looks like, plus annual fund audits flowing through at the end of the year, should provide a more solid baseline on which sellers and buyers can negotiate. So far this year, fundraising for the strategy has been weak. Secondaries Investor reports that PE secondary funds collected just $24.2 billion in the first three quarters of this year, a 49% drop on the same timeframe last year amid a generally more challenging fundraising environment.  However, LPs can take comfort from the fact that in spite of this slowdown combined with the pervasive demand for liquidity among their peers, secondary dry powder is due to be replenished en masse.  Evercore estimated earlier this year that $111bn of capital was planned to be raised by secondaries managers in the year through August 2023, well above the prior year. Montana has also found that secondaries are  now the second most popular PE strategy after mid-market buyouts among LPs seeking to deploy, ahead of ahead of growth capital, venture capital and private debt. The industry\’s biggest names including Ardian, Lexington Partners, Goldman Sachs Asset Management and HarbourVest Partners are all in the process of raising multi-billion dollar flagship secondary funds and that\’s not to mention the mid-sized specialists, as well as opportunistic buyers on the margins. There\’s little doubt that 2023 is shaping up to be what could be the most active year for PE secondary deal flow in history in the face of a restrictive exit environment. The leading secondaries names are all active buyers on Palico and will be watching as LPs continue to list their funds to test the market as conditions develop.   Book a time to discuss selling a PE fund stake
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About Palico

Palico is the leading digital marketplace for private equity primaries and secondaries specifically designed for fund managers and institutional investors.

Primary Platform: Palico’s primary platform is a comprehensive fundraising solution. GPs have access to a full array of digital tools to communicate and nurture prospective investors, including: Virtual Data Room, Messaging Module, Stats for fundraising performance, and Newsroom. Those tools are complemented with a matchmaking algorithm that alerts a vast LP member base (over 2,800 LP members and counting) of new fund investment opportunities and a notification system that notifies the LP network when the Newsroom is updated with major milestones and events.

Secondary Platform: Palico’s secondary marketplace, designed by PE industry experts, standardizes the process of selling and buying PE fund interests — especially for smaller transaction sizes (~$2 – $20M). The marketplace features nearly all traditional major secondary funds in addition to hundreds of non-traditional/opportunistic buyers. From single family offices to large pension funds, LPs are now a few clicks away from participating in and enjoying the versatility that secondaries provide to their PE portfolios.