What are secondary buyers looking for in these uncertain times? What are attractive investments today? What advice would buyers give LPs wanting to sell in this environment? These were topics addressed by our Head of Strategy, Claire Commons in a webinar we hosted in partnership with SuperReturn. Claire was joined by some of the most preeminent secondary experts from VCFA, Coller Capital and Hamilton Lane. • 6 min. Read •
During the hour-long webinar, panelists shared their insights on the growing acceptance of secondaries, the level of activity they are seeing on the market, new deal structures to overcome valuation debates in the current environment and how technology has become a key deal facilitator. Read on to find out about the main takeaways.
Secondaries acceptance has grown
The secondary market has grown significantly over the past decade and secondary funds are now the fastest growing PE sub-asset class with buyers having record amounts of dry powder at their disposal. There has also been growing acceptance from LPs who increasingly use secondaries as an active portfolio management tool.
“The secondary market has emerged as a great tool for investors to manage their portfolios in a more active fashion. LPs can use secondaries to reduce their amount of tail-end funds, dynamically shift among strategies within private equity or get liquidity,” Commons explains.
“Back in 2008, secondaries was a market of last resort and you only sold if you had to. Over the last 5 to 10 years, it’s become a much more accepted liquidity mechanism for investors in private markets. There’s a lot of capital out there and a lot of choice in terms of opportunities” says Richard Hope, Managing Director at Hamilton Lane.
The secondary market remains active despite the crisis
As can be seen not only from Palico platform data, the secondary market is still seeing some level of activity, despite volume softening because of the pandemic, especially with COVID resistant assets pricing relatively well. The panel generally agrees that deal volume will likely pick up as of July this year, when GPs release Q2 valuations giving more visibility to investors.
Francois Aguerre, Co-Head of Origination at Coller Capital, expects that: “...H2 will be quite busy as a lot of people will want to make up for H1. Market activity has slowed but there are opportunities coming across our desk in all geographies and especially the US, where lock-downs have been less severe”.
Interestingly, this crisis differs from the global financial crisis (GFC), as was pointed out by Andrew Reilly, Director at VCFA: “We see this as very different from the GFC. We are not seeing sellers who have big and deep underlying structural financial distress. We’re seeing sales that are more of a special situation or a strategy”.
Relating this back to the sophistication of the secondary market, Claire Commons highlights, that “as compared to the 2009 crisis, the market has matured, with over 70 dedicated secondary buyers [participating in the market] today. [During the same time,] the innovation and customization and specific strategies have also developed. There are buyers now for all shapes and sizes of investment portfolios.”
New deal structures emerge to overcome valuation uncertainty
With uncertainty around how portfolio companies are being impacted by the pandemic, new mechanisms are being put in place by buyers and sellers to minimize debates around valuation.
“We see special equity instruments, earnout mechanisms and tailor-made waterfall structures being put in place. These are not of specific interest to the parties but they simplify the valuation discussion” explains Aguerre.
In the current environment, Hope advises sellers wanting to transact to be clear about what their goal is: “What is it that you are hoping to get? To free yourself from future commitments or to try to maximize the price? What you can structure will depend on that objective.”
More generally, Commons sees interest in selling positions with a lot of unfunded capital. “It solves two problems: this unfunded liability that may be pinching the investor on the sell-side and, there is less negotiating or arguing around pricing on the buy-side because it is more of a liability”.
From the buyers’ perspective, VCFA is currently focusing on assets and managers they have built relationships with. “If we know a company, a management team and know that asset well, it’s definitely at the top of list of things we look at. And then the price needs to be right” says Reilly.
Technology is increasingly facilitating deals
In light of worldwide lockdowns and travel bans, technology has been more important than ever to conduct business and secondary deals.
“At Hamilton Lane, we’ve invested heavily into tech business providers for private markets and it has been hugely helpful for us” says Hope.
As Commons sums it up during the webinar: “There has been huge innovation at the intersection of private equity and technology. At Palico, we use technology as an innovative tool to focus on the smaller end of the transaction sizes which makes things more streamlined and efficient. It’s great for sellers, whether they are first-time sellers, or more experienced, and on the buyer side there are all these potential deals that no one had ever seen before”.
Palico is the leading digital marketplace for buying and selling private equity secondaries. Our digital platform is designed for LPs, from single Family Offices to large Pension Funds, to streamline the secondary sales process, and maximize price with an array of both traditional and non-traditional PE buyers on the platform.