Law firms’ take on the secondaries market

Leading global law firms share their views on the changing shape of the private equity secondaries market.

Sales by funds of funds were a significant driver of secondaries deal volume last year, according to an annual survey of law firms’ secondaries activity by sister publication Secondaries Investor.

Four respondents worked on the sale of large tail-end portfolios in 2017; many of these deals involved funds of funds coming to the end of their lives. Favorable market conditions also led to an increase in sell-side activity from secondaries funds from across the maturity range.

“[It’s] a good reminder that buyers can become sellers if the price is right,” said Ted Craig, head of the secondaries practice at MJ Hudson, which acted on 36 secondaries deals in the 2017 calendar year with a value of $1.5 billion.

Family offices also increased their presence on the sell-side last year as they cleaned up their holdings and took advantage of high pricing, according to Gabriel Boghossian, a partner at Stephenson Harwood.

“A trend towards standardization of deal terms on the smaller LP trades means that deals that formerly would take six to eight weeks to agree and complete can now be wrapped up in under a month,” he added.

Stephenson Harwood worked on $1.35 billion-worth of deals, 65 percent of which involved buyout funds, 20 percent of which involved secondaries or funds of funds and 10 percent venture capital funds. Around 2-3 percent of its deal volume involved the sale of a portfolio of African interests.

GP-led processes and other complex transactions continued to grow in prevalence last year, with a majority of respondents citing them as a significant part of their business.

For Kirkland & Ellis, 53 percent of deals were GP-led transactions, recapitalizations or restructurings. In total the firm worked on $12.9 billion in volume across 79 transactions.

Gibson, Dunn & Crutcher advised on $2.95 billion of secondaries transactions last year with 90 percent of its work by volume involving LP stake sales. New York-based partner Edward Sopher noted the growth in GP-led and other non-traditional secondaries deals. In his view this is driven by the growing array of investors considering secondaries sales, their varied liquidity and tax requirements, and a corresponding increase in creativity on the part of secondaries managers.

One such deal type is structured direct secondaries, which according to Proskauer increased last year. Proskauer also noted it worked on more emerging markets deals, particularly in Asia and Latin America. It advised on $13.75 billion of transactions for firms such as Landmark Partners, Greenspring Associates, Lexington Partners and Pomona Capital.

Morgan, Lewis & Bockius worked across various asset classes with 50 percent of its work involving buyout funds, 20 percent involving venture funds, 18 percent infrastructure, 6 percent energy and 6 percent real estate. It worked on $7.3 billion-worth of deal volume last year, 95 percent of which was LP stake sales.

“The market has remained increasingly competitive for buyers and attractive to sellers, resulting in a number of opportunistic sales by institutional sellers,” the firm noted. “We continue to see a strong pipeline of deals in 2018.”

Debevoise & Plimpton worked on $1.9 billion of secondaries transactions, all involving private equity. Most of its work involved advising GPs on stake sales by limited partners, so the overall size of the portfolio was often difficult to ascertain, the firm noted.

Deal volume was defined as purchase price plus unfunded commitments for transactions that closed between January and December, and data was submitted by law firms.

Firms including Ropes & Gray and O’Melveny & Myers did not respond to requests for information.