Outlook positive for PE secondaries with USD61bn earmarked for 2021
The outlook for demand in the private equity secondaries market throughout 2021 – and in particular, H1 2021 – is very strong, with buyers looking to deploy USD61 billion in 2021.
That's according to Cebile Capital's 2020 Year-End Secondaries Market Update, which summarises key trends witnessed in 2020 and outlook for 2021 from key secondaries investors. Cebile surveyed over 95 per cent of the active secondaries investors globally to gain insight into their investing activity in 2020 and outlook for 2021.
The survey found that a significant amount of dry powder earmarked for deployment in 2020 remains unallocated. Following a slowdown in investing activity in H1 2020, secondary buyers previously expected to double-down on their deployment to meet their full year allocation goals. However, as the year draws to a close, it seems unlikely that all buyers will meet their 2020 deployment goals, with USD18 billion of 2020 earmarked capital still outstanding as of November 2020. Nearly half of investors do not expect to meet their 2020 targets and deal volume is expected to be USD39 billion for the year, roughly half the transaction volume which occurred in 2019.
Most of the remaining 2020 dry powder is concentrated amongst the largest players.
While investors with USD1 billion or more of available capital represent just 11 per cent of buyers by total number of investors, they account for 61 per cent of the capital pool. Over a third of outstanding 2020 capital is held by investors with less than USD1 billion of available capital. Sufficient transaction supply – and in particular, a supply of large deals – before year-end is unlikely to occur to allow investors to meet their deployment targets.
Investors with USD1 billion or more of capital earmarked for investment in 2021 represent 32 per cent of buyers, accounting for 83 per cent of available capital.
Deal volume in 2020 is set to be 50-55 per cent lower than it was in 2019; and the total completed deal volume this year is expected to stand at USD39 billion. However, nearly two thirds of respondents expect either a slight or significant increase in deal supply during H1 2021. Large, but not mega-sized, investors expect to be the key beneficiaries of the type of 2021 deal supply that is anticipated to come to market.
With regards to valuation, pricing and performance figures, most buyers expect Q3 NAVs will be written up by as much as 10 per cent, and 62 per cent of buyers expect pricing to be lower than comparable pricing pre-Covid. Furthermore, the impact of Covid-19 on pricing and returns in the secondaries market is expected to continue to persist for some time – one third of investors feel the market’s return to normal is still three top six months away, while over half believe a return to normalcy is at least nine months or more away. Nonetheless, approximately 81 per cent of buyers expect Covid-19’s impact will result in returns that are at or above their targeted underwriting.
Surge in demand for GP-leds, with continuation vehicles most favoured
Cebile Capital has found that GP-led transactions were an increasingly important portfolio management tool in 2020, as they enabled buyers to perform in depth analysis of the underlying assets and provided managers with additional time to maximise value. Nearly 60 per cent of investors reported that GP-led deals represented 40 per cent or more of the transactions they completed in 2020 and over half said GP-led deals were 40 per cent or more of their completed deal volume in Q3. Investors have found these solutions to be attractive, as GP-led deals in 2020 are already expected to outperform their LP-led counterparts completed this year. Buyers’ target returns for GP-leds will remain consistent in 2021, as 65 per cent of investors expect they will be able to underwrite such deals to MOICs of 1.8x or higher.
Demand for GP-leds is expected to continue into 2021, with USD25 billion of dry powder designated for deployment in 2021 for deals of this type. Nearly 60 per cent of investors expect GP-led transactions will continue to represent 40 per cent or more of completed deal volume over the next six months.
Most GP-led deals brought to market in Q3 were multi-asset ones. Over three-quarters of buyers reported that 40 per cent or more of GP-led deals they assessed in Q3 were for multi-asset portfolios. In H1 2021, the proportion of multi-asset GP-led deals is expected to increase, as five in six buyers expect that multi-asset portfolios will represent the 40 per cent or more of GP-led deal flow that comes to market over the next six months. Still, demand for single-asset and/or concentrated deals remains strong, as two-thirds of all buyers will maintain their appetite for concentrated GP-led opportunities in 2021.
Over two thirds of buyers expect continuation vehicles to be their preferred GP-led deal structure in 2021. Conversely, tender offers, fund top-ups and bridge funds are expected to be buyers’ least favoured structures for 2021.