In Coller Capital’s latest edition of its bi-annual secondaries market webinar; members of Coller’s New York investment and investor relations team discuss the macroeconomic forces that impacted the market at the end of 2023; the continued liquidity crunch affecting both LPs and GPs; latest trends in GP-led and LP-led transactions, what credit secondaries will look like in the near-term and whether 2024 will result in a record year for the global secondaries market.
00:05:13:00 – 00:05:38
Hello and welcome to Coller Capital’s Secondary Market Webinar. My name is Roseita Monteiro....
00:05:38 – 00:06:01
There is a lot of optimism that 2024 will be a big year for secondaries, and I’m excited to be joined by my colleagues to talk about the global dynamics shaping the market and what the rest of the year may bring. If you have questions during this webinar, please submit them via the ‘Ask a Question’ button on the screen and we will get back to you after the session.
00:06:01 – 00:06:28
In the first half of 2023, we saw global macroeconomic headwinds affecting bid ask spreads to the point where some buyers and sellers could not agree on valuations to successfully transact. Eric, how has the economic climate changed since then and what are the implications for the secondaries market? Thanks, Roseita. So overall, the macroeconomic environment has improved, Interest rates have stabilized.
00:06:29 – 00:06:59
Public market confidence has come back. The public markets have recovered over the course of last year and investor confidence is coming back into the markets. Now, all of that being said, LPs are still facing a big liquidity challenge. Investors are overallocated to private equity and many investors are not receiving the distributions that they originally modelled out of their private equity portfolio.
00:06:59 – 00:07:25
There’s almost $3 trillion of unrealized FMV in the ground today just in buyout funds. To put that into context, that’s four times what it was back in the global financial crisis. That should continue to support the activity in the secondary markets and it should be no surprise that last year, so 2023 ended up being the second highest you’re ever in terms of secondary volume.
00:07:25 – 00:07:55
2023 was a challenging year for fund raising overall, but we saw some big secondary fundraises. What does that mean for market dynamics? Yeah, that’s right. Secondary private equity had a great fundraising year last year relative to the rest of private equity. I think that’s a reflection of how investors see the risk return profile of secondary private equity and in particular how compelling it can be in these moments of time where liquidity is needed by investors in illiquid asset classes.
00:07:55 – 00:08:22
The market itself continues to be very well balanced. So while there’s been a lot of capital raised within secondary private equity, there’s been a growth in underlying transaction volume. And so, as we think about the overall supply demand balance, it continues to be pretty well balanced as it has been for the last decade or so. And relative to the primary private equity markets, it’s a much better supply demand dynamic.
00:08:22 – 00:08:46
Daisy, as more transactions getting done, do you find buyers and sellers to be on the same page as it relates to valuations? Yes. So as Eric had said, 2023 was the second highest year in terms of transaction volume in the secondary space. And similarly in the LP-led market, it was also a record year in terms of the volume of transactions that was done being the second highest in its history.
00:08:46 – 00:09:16
In terms of what’s driving that trend, there’s an improvement of buyer sentiment across all of the reasons that Eric had outlined earlier. Public market valuations having improved over the course of 2023 and into 2024, the stabilization of interest rates and generally earnings for public companies have either surprised on the upside or been consistent with consensus. So all of those factors have led to a narrowing of the bid
00:09:16 – 00:09:44
Ask spread on transactions in the LP-led led side of the market and specifically on portfolios of high quality buyout companies managed by blue chip managers. There has been a real narrowing of spread in terms of the bid ask spread. And so there. So that would lead you to believe that there is generally more of an agreement around valuations that there have been previously.
00:09:44 – 00:10:03
On other parts of the market, for example, venture/growth to bid ask spread is still quite wide on those types of transactions. So that would lead you to believe there’s still a little bit of a gap in terms of what buyers and sellers are seeing as fair valuations for that side of the market. Daisy, talk to us about the seller side. What motivated sellers to transact last year?
00:10:03 – 00:10:39
Yeah, liquidity, right. I think Eric mentioned that the need for liquidity as distributions have slowed down due to a lack of M&A volume and IPO markets and that slowdown has led to even continued outflows that doesn’t aren’t matched by the inflows of distributions. That’s been a lot of the driving force behind many reasons why a lot of the LPs come to market in the secondary market in terms of some of the key trends that we saw last year.
00:10:40 – 00:11:11
I think I would highlight four areas. One being that there’s a real leaning in into high quality assets from blue chip managers. That’s an area that’s very well received by the secondaries market. We saw an increase in larger transactions being done. So billion dollar plus transactions, younger vintages. The statistics say something like the average vintage last year was a whole year younger than the previous year.
00:11:11 – 00:11:44
And then finally, we’ve also seen more managed fund structures with some element of primary capital so that managers can continue to deploy and invest with the key relationships that matter, With the bid ask spread narrowing, what does pricing look like now? Yeah, so pricing in 2023 was around $0.82 across all strategies, and that’s an improvement from even the first half of the year where it was somewhere in the high seventies.
00:11:44 – 00:12:21
And that bifurcates between different strategies, like I had said earlier, high quality buyout is trading something close to the nineties and there’s a real leaning into managers that people know and assets that they like and infrastructure private equity has also been an area that pricing has been quite robust and as I had said earlier, on the venture/growth side, there’s a bigger gap. Daisy, what is the outlook for LP-leds for the rest of 2024?
00:12:21 – 00:12:49
Yeah, we expect 2024 to be a record volume year at $65 billion in LP-led volume. We expect to continue to see larger portfolios of billion dollar sizes plus come to market and solved by a combination of mosaic and structure solutions. Eric, many thought the GP-led market would have been more subdued in 2023 relative to 2022, but we saw an increase in deal volume.
00:12:49 – 00:13:19
What do you think drove this activity? Yeah, so 2023 we saw just over $50 billion of transaction volume in the GP-led market. That’s up from mid to high 40 billions in 2022. If you look at the ten largest secondary transactions last year, five were GP-Leds, four were multi-asset transactions, one was a single asset transaction and all of which were greater than $1.5 billion in transaction size.
00:13:19 – 00:13:44
What trends are you seeing across different types of GP led investments? For the most part, continuation funds are the most popular type of transaction. Last year, we saw an uptick in the number of multi-asset continuation funds as buyers try to find more diversification in the underlying transactions and GPs and sellers realized by adding more companies to a transaction, they may be able to get greater liquidity out of the transaction itself.
00:13:44 – 00:14:10
Multi-assets were about half of the overall GP-led market, about a third of the market were single asset continuation funds. And so the idea where sponsors can continue owning companies for longer, raising capital to support those companies whilst giving the existing investors a liquidity option, that trend continues and it makes a lot of sense, especially in this environment where LPs are seeking liquidity.
00:14:10 – 00:14:33
On balance, over 90% of investors are taking liquidity when presented the option, and that compares to, you know, zip code, 75% going back a couple of years. What does the investment team look for when screening such investments given that there is such a large volume in supply?
00:14:33 – 00:15:02
Yeah, there’s a wide-ranging type of transaction structure within the GP-led markets. At Coller, we’re looking to lead or co-lead these transactions. That’s our most comfortable place. We like setting valuation, we like setting terms both economic and governance and being a lead investor in these transactions. We’re looking for great companies. We’re looking for sponsors that know these industries inside and out.
00:15:03 – 00:15:24
We do business with groups that we’ve known for a long time, but we also do business with GPs that we’re getting to know and have gotten to know more recently. The average investment size can be anywhere from $100-200 million up to $400-$500 million for a multi-asset transaction for us and of course could go bigger under the right circumstances.
00:15:24 – 00:15:50
What are your thoughts on the forecast for 2024? So we expect 2024 to be up on 2023. We’re currently forecasting $65 billion in volume and that compares to just over $50 billion in volume in 2023. 2023, we saw a pickup in activity in the second half of the year and that activity has continued early on here in the first half of 2024.
00:15:51 – 00:16:11
Shifting gears now to credit secondaries, as we’ve covered in the last few webinars, this is one of the fastest growing parts of the market. Ed, have you seen momentum slow at all in 2023? Not really. It’s been the opposite, I would say, really, since we closed our first fund, we’ve seen acceleration in the growth of the market.
00:16:12 – 00:16:33
It’s interesting because private credit, it’s still newer to the secondaries market, so it’s less intermediated. So what that means is the reported data is just it’s not as robust. So you’ll read reports that say 5% of the market was credit last year. Just based upon what we’ve seen come across our desks, a lot of non-intermediated transactions, we think that’s a very conservative number and it will continue to grow.
00:16:33 – 00:16:52
The other way I would look at it is you know, secondary is a derivative of primary. So as the primary direct lending market matures and I use direct lending because that’s the biggest chunk of the market, you’ll start to see that natural rate of turnover come in just as it did with private equity going back the last couple of decades.
00:16:52 – 00:17:16
What macroeconomic factors affect credit secondaries and what do you think we should keep an eye on in 2024? So I’d probably break that into two buckets. One is the market and the other is performance. So on the market side, Daisy mentioned earlier: slowdown in M&A, fewer IPOs driving need for liquidity for owners of private equity.
00:17:16 – 00:17:42
It’s really the same in credit. liquidity needs are the same, the drivers are the same. It’s just really they’re selling a different asset. There’s a lot of similarity there. On the performance side, a distinction I would make is that most of private credit is floating rate. So if you think about the underlying performance of what we’re underwriting and what we’re buying in a rising rate environment that will on the margin help performance and as rates decline, that could impact performance negatively.
00:17:42 – 00:18:06
I would highlight also though, in a higher rate environment that could impact things like interest coverage or liquidity at underlying companies. So there’s a bit of a double edged sword impact of rising rates. But on average, higher rates are good for credit and credit secondaries.
00:18:06 – 00:18:32
What will the near-term future for credit secondaries look like? So the way the markets developing, it’s still young. We are seeing more capital formation. But I would say just as on the private equity side, there is a significant undercapitalization of the market even with new entrants. One of the benefits of new entrants, in particular in credit, is diversification and credit is arguably more important than equity because it’s an asset that has asymmetric downside risk.
00:18:32 – 00:19:12
So in managing large deals with potential concentration, sometimes multiple buyers can help get a transaction done. The other thing we are starting to see is more specialization. Meaning I talk about senior direct lending me the largest chunk of the market, but you can see funds specializing only in senior where they have a lower cost of capital to funds specializing in distressed, opportunistic credit, asset based finance, where they’re more they’re more niche today but as those underlying markets grow, you can potentially see more specialization in credit secondaries.
00:19:12 – 00:19:42
The other area I would highlight is NAV lending, which, you know, in the world of secondaries, if you think about it, the underwriting is very similar. You’re underwriting pools of cash flows. And we might find whether it’s in the equity side of the business or on the credit side of the business, that the better risk proposition for us is, is not to buy the assets or to buy the funds, but to lend against them.
00:19:42 – 00:20:06
And so that’s led to the growth of that part of the market where it’s a credit product so it fits neatly within the credit secondaries remit but again, we’re taking the assets as collateral rather than outright purchasing so we see this as another big growth area in credit secondaries. As we look back over the past year, what is your biggest takeaway from 2023?
00:20:06 – 00:20:31
I would say the best word to describe last year would probably be resilience. If you look back to the last webinar where our colleague Jon Leu talked about secondaries as an ‘all weather strategy’, I would say last year really proved that out. You heard earlier, Eric and Daisy talk about volatility, bid offer spreads earlier in the year that normalized over the course of the year which is typical in our market.
00:20:31 – 00:20:52
And so I would expect you know even with a strong start to this year it’s you know there’ll be fits and starts to the market. But what I would say is that consistently over time, given the depth of the market, LPs and GPs know that there is always a place to go to if they need liquidity and I think that’s going to be a key theme for years to come for the secondary market.
00:20:52 – 00:21:20
Eric looking forward, what is the forecast for secondaries overall in 2024? Yes, so for private equity secondaries, we expect the recent momentum to continue. There are some market participants who are forecasting the highest year ever in terms of secondary transaction volume. As we sit here today, we’re forecasting $130 billion in volume and that’s going to be split roughly equally between the LP-led and the GP led side of the market.
00:21:21 – 00:21:48
Daisy, could you expand on broader trends that we expect this year? Right, transaction sizes will get bigger. We expect to continue to see multibillion dollar portfolios come to market. The market will continue to specialize. In addition to credit, we expect more specialization in the infrastructure secondaries aspect of the market and then on private equity secondaries, expectation is that there will be innovation.
00:21:49 – 00:22:10
And then lastly, we’ve talked about private wealth in previous webinars that trend of private wealth investors coming into the secondaries market will be a trend that we expect to continue to see in 2024. 2024 is off to a strong start for secondaries and many are bullish and expect an increase in the breadth and depth of the market this year.
00:22:10 – 00:22:27
I’m grateful to Eric, Ed and Daisy for joining me today. If you submitted a question during this webinar, we’ll get back to you shortly. If you have feedback on your webinar experience, please share your thoughts using the survey on this platform. From the entire Coller Capital team, thank you for tuning in.
