Managers of private equity secondary funds are bullish on deal flow for the remainder of 2023 and have continued appetite for debt, despite soaring interest rates, according to a new research conducted by banking and wealth management group Investec.
Managers of private equity secondary funds are bullish on deal flow for the remainder of 2023 and have continued appetite for debt, despite soaring interest rates, according to a new research conducted by banking and wealth management group Investec.
The bank’s latest annual report into the sector, ‘Secondaries shine in turbulent times’, found that almost all (93%) GPs in this space said they believe 2023 deal volumes will exceed last year’s levels. In Investec’s 2022 report only 79% said the same.
This bullish outlook is reflected in demand for finance for secondaries deals, which has proved resilient.
GPs are increasingly using finance for both LP-led and GP-led deals – with triple the number of managers using the latter compared with last year, according to the report. The number of GPs using debt on LP-led deals has risen from 30% to almost half (46%) compared with last year. For GP-led deals the number jumped from 10% to 31%.
More than three-quarters (77%) of secondary managers expect their use of debt financing to remain the same in 2023, despite interest rate hikes.
The positive sentiment around secondaries is reflected in managers’ outlook for fundraising. In contrast to other areas of private equity, secondary managers are expecting to raise larger pools of capital.
Investec’s research showed that more than half of secondary managers (52%) have successfully raised over €1bn for their last fund, and even more (58%) expect to exceed €1bn for their next fund.
As for funds of more than €2.5bn, expectations have also edged up: 30% raised more than this for their last fund and 32% of managers expect to raise more than this for their next.
More than 90% of secondary managers have plans to fundraise in 2023, a clear indication of their high expectations of the market.
The research showed there is supply to meet demand for borrowing, with 90% of managers still finding there is appetite from lenders to meet their needs.
However, concerns are growing around concentration risk. Almost all (93%) of managers used banks as lenders – which could prove problematic as liquidity shrinks in some areas of the banking sector.
The rising rate environment has also sparked caution among managers around loan-to-value (LTV) ratios. When looking at GP-led, deal-based financing, half of respondents this year requested LTVs under 20%, compared to only a third (33%) requesting below this level last year.
Investec’s research was based on a poll of more than 30 general partners (GPs) operating in the secondaries market.
