By A Paris – The shock of the Covid-19 pandemic led to a significant increase in GP-led deals across the private equity secondary market as managers sought to provide investors with liquidity as funds expired.
In Q2 2020, the market was hit by Covid-19 and there was a shock effect with many deals being put on hold, volumes falling around 50 percent and secondary prices dropping 15-20 percent. This was followed by a strong rebound in late 2020, driven mainly by GP-led deals (catch-up effect, liquidity need for tail-end assets / funds and in general alternative funding / portfolio support solutions),” says Christian Bohler, head of secondaries at Unigestion. “This rebound has continued into 2021 and we believe that volumes will go back to 2019 levels but with a higher ratio, around 50 percent, of this being made up of GP-led deals.”
“PE managers explored the GP-led route during the pandemic due to the difficult selling environment, which left many unable to realise expected returns and make distributions to their limited partner (LP) investors,” write Nicola Chapman, Martin Forbes, Colin Harley and Sherri Snelson, of White & Case.
For example, they note there were only 1,467 PE exits in 2020, down from 1,718 in 2019 and the lowest annual total since 2013. “Managers were reluctant to proceed with company sales in a volatile market that could compromise exit valuations,” the lawyers outline.
In June 2020, when the world was still at the sharper end of the pandemic, Christophe De Vusser, Partner, Bain & Company observed: “Cash flow, will be a critical issue for both LPs and GPs in coming months. To the extent portfolio companies need more capital and LPs are pressed to provide it given other demands on cash, different sources of capital will likely step up… The system has ample capital. It will inevitably flow to where it’s needed most.”
The secondaries market has proven to be a primary way for GPs to make sure liquidity flowed where it was meant to.
LP-led deals rising
Over the course of the rest of 2021, industry commentators anticipate the return of LP-led transactions.
“As the market recovers, we expect to see a few key trends that will influence the global secondary market’s future direction and growth. These include a rebound in LP-led transaction volumes, growing appetite from institutional LP and greater specialisation across secondary buyers,” details Gerald Cooper, partner and head of US secondaries, Campbell Lutyens, in a 2021 secondary market overview.
In Bohler’s view: “The LP-led market is coming back slowly but steadily and a key consideration for sellers is the cut-off date and where the valuation stands in the longer term. They should also consider what the appetite is and the likely target price for the portfolios.”
As transaction volumes increase through the year, Bohler advises secondary managers to stick to their strategy, whether they’re focused on large or small transations; LP- or GP-led deals. “At the same time, they need to stay flexible and opportunistic to take advantage of deal opportunities that arise,” he stresses. n
