GP-Led Deals Take Center Stage in the Secondary Market

Private-equity firms drove the market for secondhand trades in private funds and assets in 2020, after several years of playing a supporting role.

General partner-led deals are expected to account for an estimated half to two-thirds of 2020 secondary deal volume, according to buyers and intermediaries, up from a little less than one-third of transaction volume in 2019.

“GPs are leading the majority of the market for the first time,” said Nigel Dawn, head of the private capital advisory group at Evercore Group, one of the largest secondary intermediaries.

Secondhand trades of large fund portfolios slowed to a trickle after the coronavirus pandemic hit, dragging down overall secondary volume in 2020. Assuming capital markets continue to stabilize, buyers and intermediaries say they expect deal volume to pick up dramatically in 2021, with larger fund portfolio deals resuming by the end of the first quarter. Buyers, however, added that a giant cash pile raised by secondary buyers, combined with the massive potential supply of unrealized private-equity assets, strong equity markets and growing market acceptance, will ensure the continued popularity of GP-led transactions in 2021.

“I think we have [only] seen the tip of the iceberg on GP-led deals,” said Tom Kerr, head of secondaries at Hamilton Lane Inc. “This is a space where, increasingly, GPs have become aware of the benefits and flexibility that these solutions can provide.”

As of March 2020, private-equity firms held a total of more than $2 trillion worth of unrealized assets in funds of vintage years between 2012 and 2017 alone, according to data provider Preqin Ltd. Secondary deals offer firms a way to monetize those investments while still holding on to the assets.

Secondary buyers are well capitalized to fund such deals. As of November 2020, secondary firms had a record $115 billion in available capital to invest, Preqin data show. The more than $64 billion that such funds raised in 2020 as of November only promises to add to the cash pile.

Firms that announced general partner-led deals in 2020 include Ampersand Capital Partners and Kinderhook Industries. Many others were in the process of negotiating such deals as 2020 drew to a close, including Audax Group, Hellman & Friedman and Summit Partners, according to secondary buyers and recent press reports.

Secondary buyers have been willing to offer strong pricing for assets that have thrived in the pandemic, making them a competitive alternative to an initial public offering or a sale for private-equity firms seeking liquidity for those assets, industry experts say. It’s often easier for buyers and sellers to value these deals than a large portfolio involving multiple funds and even more companies.

“If the GP decides it makes sense to do something, they can move forward more quickly,” said Mike Bego, founder of Kline Hill Partners, a secondary firm focused on small and midsize deals.

Buyers say GP-led deals involving just one asset also increased in 2020, including one involving Thomas H. Lee Partners-backed wealth advisory firm Hightower Advisors.

But some buyers hesitate to back portfolios concentrated in just one asset and the larger of these transactions often get split among multiple firms.

“We think about concentration a lot,” said Chris Perriello, co-head of the secondary team at AlpInvest Partners, which raised $10.2 billion in December for its latest secondary fund and co-investment program. “We’re not against doing a single asset deal, but the bar is definitely higher.”

Secondary buyers predict GP-led deals will remain popular in 2021. However, they say that by the end of the first quarter, such deals will face more competition for buyer capital, as institutional investors bring larger fund portfolios to the market again, particularly as investors better understand how companies have weathered the pandemic.

“I think there’s a lot of pent-up demand among LPs looking to actively manage their portfolios,” said Wilson Warren, president at New York-based Lexington Partners. “It’s always easier to sell when you feel a bit better about the underlying [portfolio values].”

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