In our Autumn Private Capital Secondary Market Webinar, Stephen Ziff, Partner and Head of Coller’s Investor Relations team is in discussion with Michael Schad, Katrina Liao and Iyobosa Adeghe from our London team about the market dynamics we are seeing and what it might mean for the remainder of 2024 and going into 2025.
We also take a look at LP led investments, GP-led investments and delve into the latest developments in the Secondary credit market.
00:20 – 00:42
Hello and welcome to the autumn edition of Coller Capital’s Private Capital Secondary Market Webinar. ...
00:43 – 01:12
Now, we believe 2024 is shaping up to be a record year for the secondary market, and we’re looking forward to talking about the markets’ dynamics and just what that might mean for the rest of this year. We will take a look at LP led investments, GP led investments, as well as the latest developments in the secondary credit market. If you have any questions during the webinar, please submit them via the Ask A Question button on the screen and we will get back to you after this session.
01:13 – 01:35
The first half of 2024 has seen a remarkable and busy period for our industry, with somewhere in the region of $70 billion of secondary market transactions, a new record for the asset class.
So, Bosa, coming to you first. Strong volume in the first half of this year, how does it compare to what we’ve seen in recent years?
01:36 – 02:22
Thanks, Stephen. As you note, it’s been really, really busy first half of this year. And the $70 billion of transacted volume compares to $40 billion in the first half of 2023. So that’s a really strong recovery, putting us on track for $140 billion in transacted volume. And when you consider that in many years volume has actually been weighted towards the back end of the year. There’s real potential to exceed that $140 billion. I’d also put that number in the context of a dip in volumes over 2022 and 2023, from the market highs of 2021. So that recovery in just a few years to new market highs is really impressive to see and really speaks to the resilience of this market.
02:23 – 03:46
And tell us what’s driving that recovery?
So there are a few things driving volumes at present. The first thing to note is a shortfall in distributions to LPs, driven by a shortage in underlying M&A and a shortage in capital markets activity. So with that context, the secondary market is a really valuable way to make up for a shortfall in liquidity and in distributions. The second key driver is over allocation to private equity. This is something that LPs have handled for many years, and there are many LPs that have been able to live with an over-allocation or have been able to obtain waivers and amendments that allow them to run with an excess allocation to private equity. But there are equally many LPs that have decided that there is a real need to do something now to address what has been a long-standing issue. And we think that it’s going to be a real driver of volumes the rest of this year, going into 2025 and beyond.
The final thing to note is that the secondary market is a really valuable tool for adjusting allocations over time, independent of over-allocation and independent of liquidity issues i.e. tailoring your allocation by manager, by geography, by strategy, and that proactive portfolio management is going to be a real driver of volume over many decades.
03:47 – 04:49
So it feels like for LPs it’s both a strategic and an opportunistic tool. Tell us a little bit more about the type of LPs that are accessing the market. Is it first-time LPs? Is it repeat sellers? What’s what’s the makeup?
It is the full range. I would note that there has been a step up in the number of LPs using the market for the first time in the first half of 2024. To give you a data point, Jefferies note that 45% of the transactions completed in the first half involve the first time seller, which compares to 39% in the first half of 2023. And we think that’s a really healthy dynamic because these first-time sellers are really building the pipeline of future secondary transactions down the line, because once you’ve used the secondary market once and had a good experience, it really increases the probability that you decide to use the market again in a year or two’s time. Again, going back to that proactive portfolio management.
04:50 – 05:22
Great, let’s now take a look at the GP led part of the market, which is also seeing very strong growth. Now volume for the first half of this year was about $30 billion, which represents about 40-43% of the overall market. And within that, continuation funds made up the bulk of the GP led transactions. I want to now turn to Katrina and talk a little bit about the GP led market and in particular continuation funds, single-asset continuation funds, multi-asset continuation funds. Just what are you seeing, what are we doing? And some trends and themes in that part of the market?
05:23 – 06:11
Sure, one of the interesting trends within the GP led market is that during the first half of this year, nearly 60% of those transactions were single-asset GP leds. That compares to last year, where it was 50/50. We believe you will continue to see more single-asset GP leds as the exit environment is challenging and it’s the only way the sponsor can hold on to their star assets. So going forward, if I think about what’s going to be happening in the GP led market, you’ll continue to see, you know, the rise of the single-asset GP leds, you’re starting to see a rise in the transaction volumes. So a lot of the transactions we saw in the first half of the year have been well over $1 billion. And also there has been a rise in the use of the mid-market sponsors accessing the market and the technology.
06:12 – 06:37
It feels like a market that’s growing, more GP’s accessing the market, larger transactions, there’s a bigger supply of volume. Is the market in balance?
So according to Preqin, a hundred billion was raised last year in secondary funds. So GP’s will have to, these sponsors, will have to put this to work. So we still feel like the market is undercapitalized and there’s still very good attractive transactions out there.
06:38 – 07:36
Two areas of the private capital market which are particularly hot right now are secondaries and credit. Michael as Head of Coller’s Credit Secondaries business, you tick both of these boxes. So let’s start first of all with an overview of the credit secondary market, what is it? What does it do and how does it work?
So the credit secondary market really does exactly the same thing as the equity secondary market does. I think the one big thing that has changed over the last 4 or 5 years since we really helped to kickstart that market is that volumes have grown significantly. Bulk of the volume is still driven by LP led transactions, what Bosa talked about. But you also see more and more GP leds coming to market, similarly, mirroring what happened on the equity side. But there’s also part of the market which used to be a big driver of secondaries, which is bank-led transactions. So it’s really a broad market by now.
07:37 – 08:08
Can you talk a little bit more about what specific assets you look for in the credit secondaries market?
So we really cover the entire universe of credit. And as you rightly say, it’s a very big, broad and diverse market. So we cover senior credit, mainly direct lending on the less risky side of the spectrum, and then move up all the way through junior credit, some distressed and also structured credit on the more higher risk part of the credit spectrum.
08:09 – 09:30
This is a young but fast growing part of the marketplace. Talk us through some of the dynamics within credit secondaries.
So it’s a really exciting space to be in, Stephen, as you say, we’ve seen a lot of growth in this market. In 2023, the annual volume was $5 billion, but already in 2024, in the first half, we saw broker-reported volumes of $4 billion. However, that doesn’t really capture what we see overall in this market. It’s much, much bigger. A lot of this market is still driven by proprietary transactions. If you dissect the market, the bulk of the volume still comes from LP led transactions. The reasons really why people are selling, are the same as you see on the equity side, it’s portfolio management, it is really looking for liquidity in this market segment. The GP led market has really come on strong, though, and it’s a trend that we really started observing from the beginning of this year. This market is growing very, very rapidly and has a lot of potential for us. We completed the largest GP led transaction to date with Abry, and the size of this was $1.6 billion. So not too dissimilar of what you see in the equity secondaries market, which is obviously multiples larger than credit secondaries.
09:31 – 10:55
A great place for us to be for sure. I want to move back to Bosa and Katrina and talk a little bit about pricing now. You operate in different parts of the market. Talk us through some of the pricing trends that you see, how they differ, do they differ within LP leds and GP leds so maybe Bosa let’s start with you first of all.
Sure. On the LP led side of the market, coupled with the increase in volumes we’ve seen over the first half of 2024, we’ve also seen, a bit of a narrowing in discounts for typical buyout portfolios. And that’s a function of much improved market sentiment.
So public markets have been strong over the first half of the year. There is reduced uncertainty about private valuations relative to public valuations. There is greater certainty that we are on the other side of rate increases that have been seen globally.
And all of that contributes to a much more positive macro environment, which feeds into pricing. And, you know, that improved pricing is helpful in that it really reduces the bid-ask spread that often is an inhibitor to transactions being completed. And it certainly helps draw a broader number of LPs into the market, who may or may not have been considering using the market otherwise.
10:56 – 11:21
Those macro factors surely must also be at play, Katrina, for GP leds as well? What do you see?
Absolutely. So I would say in the single-asset GP led space, you’re seeing pricing trending to par. On average I would say it’s par, these are star assets, that’s what sponsors would expect to sell them at. For multi-assets, you are still seeing a slight discount, it just depends on the quality of assets in the multi-asset.
11:22 – 11:49
I’m going to come back to you now Michael and I want to talk about sort of the market overall in secondaries. And just maybe give us maybe with an emphasis on credit elsewhere in the market, just your overall takeaway on the market.
I think, as we touched upon, I think the exciting bit in this market is that volumes have stepped up so much. There is an unprecedented amount of transactions that we see every Tuesday in our ICs, both in equity and credit, and that is really exciting for me to see.
11:50 – 12:30
Now, Katrina, I’m going to ask you to look into your crystal ball a little bit and give me, what you sense is going to happen for the remainder of 2024. What do you think’s out there for what’s the last quarter?
You’re still going to see volumes increase. You know, we have a lot of transactions we’re looking at now from very strong sponsors across, you know mid-cap large-cap space. So I believe that the transaction volume for the second half of the year will likely be greater than it has been for the first half of the year. If anything, there is a strong pipeline, as well, for sponsors holding off via recommendations from their advisors to ensure that the market is able to transact on all of it.
12:31 – 13:42
So it feels like a strong finish towards the end of this year, and then Bosa I’m going to ask you to look even further out and and tell us what you think 2025 has in store for our market.
Echoing Katrina’s points, there are lots of reasons to expect 2025 to be a really strong year, even with an uptick in distributions, which might reduce the number of transactions that are driven by an urgent need for liquidity, we still see over-allocation to private equity being a real driver of volumes over the longer term, and that is something that really takes a while to work through. Going back to our earlier points about first-time sellers, the increased awareness about the secondary market and its ability to allow you to proactively tailor your portfolio over time, by region, by strategy, by manager, is going to be a real underlying driver of volume over many decades.
So overallocation to private equity, increased awareness of the secondary market as a portfolio rebalancing tool are going to be really strong tailwinds for 2025 and beyond.
13:43 – 14:37
Well, Bosa, thank you. It sounds like the three of you are certainly going to be very busy over the next year. And thank you for sharing your views.
One thing we can all agree on is that this is a fascinating and dynamic time for our industry, particularly as the market continues to reach new records and evolve new strategies. We are very excited about the secondaries industry, given the dynamics we’re seeing in the market today. One might say that there has never been a better time for secondaries. There’s a widespread need for liquidity, an abundance of assets in the market, and pricing is in a sweet spot for both buyers and sellers. All of which come together to create a very favourable environment for our asset class. Now, if you have submitted a question, we will get back to you shortly and from all of us at Coller Capital, thank you for joining us today.
