Robust post-covid market conditions have led to a rebound in secondaries pricing, resulting in a seller’s market with attractive opportunities for LPs.
White Plains-based secondaries advisory M2O Private Fund Advisors has put out a mid-year survey of the LP side of the market on the heels of its first full-quarter of operations in the same segment. A total of 38 secondaries firms participated in the survey.
The firm closed five LP deals worth over $400 million and and is on track to notch more than 20 LP transactions for the year worth $2 billion-$3 billion, according to Jake Stuiver, head of LP secondaries.
On the GP-led side, the firm has completed three GP-led deals in the second quarter, projecting five-10 deals totaling $4 billion-$5 billion for the year, according to Mike Custar, head of secondaries.
The firm had previously been active in GP-leds, overseen by Custar, who was formerly the head of secondaries at Credit Suisse. It hired two associates on the LP side last month, affiliate title Secondaries Investor reported, and expects to continue growing the business opportunistically.
Here are three takeaways from M2O’s LP Secondaries Market Update: 2021 mid-year review.
Increased deployment, bigger funds
Nearly half (45 percent) of respondents indicated they are increasing 2021 deployment to compensate for limited supply in 2020. And buyers indicated they have deployed less than half of their 2021 targets through June 30 and will accelerate their pace in H2.
“The most meaningful data point we picked up on was the amount of demand out there for LP deals,” said Stuiver.
In tandem with this increased deployment, nearly 66 percent of respondents are raising secondary funds in 2021. A convincing 80 percent of buyers raised larger funds than initially expected due specifically to growing investor interest in the secondaries market.
A tale of two markets
While the capital remaining to be deployed in H2 is expected to be split equally between LP-stake portfolios and GP-led transactions, approximately 60 percent of respondents indicated they are looking more closely at LP-portfolio deals given the lopsided concentration toward GP-led deals over the past year.
In February and March, many groups were quite comfortable with their concentration to GP-led transactions, said Stuiver. Firms expect returns to be stronger than when the funds simply invested in LP deals, he added.
“Fast forward March to May, and a lot of those same groups are saying, ‘Look, we really need to get an LP portfolio done,'” said Stuiver.
Fifty-five percent of capital being raised in 2021 will be dedicated to the LP-stake side of the market, more than any other strategy. GP-led processes accounted for a third, followed by 10 percent for preferred equity and structured transactions, and 2 percent for direct deals.
Given the historically high levels of dry powder (more than $160 billion), M2O expects demand for LP secondary deals to grow even stronger in H2 2021, according to the report.
Aggressive underwriting leads to strong pricing
While most buyers (69 percent) indicated that target returns remained static, a meaningful portion, 26 percent, indicated they have lowered their targets to underwrite deals more aggressively. Average top pricing for buyout funds, for example, is running from a 5 percent discount to NAV to a 5 percent premium over NAV, according to M2O.
Because so many buyers are feeling the pinch to get something done on the LP side, pricing has moved dramatically, according to Stuiver. Speaking to feedback he gained on a particular deal for a matured portfolio, buyers are wary of aggressive bids “blowing them out of the water.”
Increased competition for LP portfolio deals, thanks to a year heavy on GP-leds, has resulted in stronger outcomes for sellers than initially anticipated. LP-deal results have typically exceeded pre-marketing price expectations by an average of 5-10 percent, according to M2O data.
This piece was updated to reflect M2O’s LP stakes and GP-Led business projections for 2021.