Dissecting the secondaries market with Chirag Shah, APFC

This article is brought to you in collaboration with BackBay Communications.

As private equity players continued their quest for diverse liquidity options, secondary funds grew faster than any other asset class in 2023, according to Bain's Global Private Equity Report 2024.

Secondary transactions provide only about $120 billion in liquidity annually for an industry with over $20 trillion in assets under management globally, but going by the market’s current rate of growth – secondary funds raised 92% more capital in 2023 than they did in 2022 and 58% more than their five-year average – the potential to achieve scale is very real.

We caught up with Chirag H. Shah, Senior Portfolio Manager, Private Equity at the Alaska Permanent Fund Corporation (APFC) – a $80 billion sovereign endowment with a $15 billion private equity portfolio – to further dissect the secondaries market. This Q&A covers a range of topics including what’s driving the impressive growth story of secondaries, AFPC’s approach to investing in this burgeoning asset class and key considerations around the buoyant GP-led market.

1. What are the main drivers for the significant growth we are seeing in the secondaries market?

In a more uncertain macroeconomic environment, private equity dealmaking, exits, and fundraising have slowed down. Buyout deal value globally fell 37% year-over-year to $438 billion in 2023, while exit value declined 44% to $345 billion, according to Bain's Global Private Equity Report 2024. With limited exit routes available, General Partners (GPs) have struggled to sell companies and return cash to their Limited Partners (LPs), making fundraising even more challenging for the industry as a whole. Global private equity fundraising fell 11.5% to a six-year low, according to Preqin data.

As a result, secondaries via GP-led transactions have become a more viable path for GPs to generate much-needed liquidity for investors. Additionally, more stable pricing has provided LPs another tool to sell portfolios to help with the denominator effect and other cash flow factors. According to Evercore, pricing for recent buyout funds (2019 vintages and recent) has improved from 86% in Q2 2023 to 95% in Q1 2024. APFC was cash flow positive in 2021, 2022, and 2023.

2. How is the Alaska Permanent Fund looking at the secondaries market? Where is it an active participant?

While we don’t invest in secondary funds, we do play in the growing secondary market in various ways, including GP-led transactions through single and multi-asset continuation vehicles (CV) whereby the GP sells one or more assets from a fund it already manages to a new structure. As GP-led deal volumes remain robust, our team is increasingly evaluating roll/sell decisions for such transactions. Private equity funds are keen to hold on to their best assets as they are hard to find, while also allowing their investors to continue to reap the rewards of these “trophy” assets.

APFC is also involved with many limited partner advisory committees (LPAC) processes that involve GP updates and approvals around continuation vehicles. We are opportunistically evaluating new investments into such transactions where there is a strong rationale for the GP, alignment of interests with investors, and compelling net returns.

3. How has your view on/approach to secondaries evolved in recent years?

Our approach has certainly evolved the past few years with the broadening of the overall secondary market. We’ve sold portfolios through the secondary market in the past and currently there are no near-term plans to do so. With the joining of our Director of Private Equity Allen Waldrop in the fall of 2022, we have also been more geared up internally in terms of decision making and improving processes around continuation vehicle (CV) decisions and evaluating select new CV investments alongside top-tier GPs.

From senior to junior levels across the team, educating ourselves around the benefits, pitfalls and mechanics of these transactions continues to be a priority. By observing live deals and sharing best practices, we can become even more constructive with GPs in our approach to this asset class.

4. How do you view GP-led sales? What do you look for from GPs when they approach you about such transactions?

The rationale and alignment of interests are paramount when we learn of GP-led ideas from private equity funds. The questions to ask to better inform decisions on CV deals include: How much of their carried interest is the sponsor rolling into the new transaction? Did they pursue a full outright sale and if not, why? In cases where there may be large add-on acquisitions, that may make for a stronger case with LPs.

We’re also able to evaluate such deals on a net returns basis after management fees and carried interest (effectively treating it like a co-investment) whereas many other LPs cannot because of internal views around management fees and carried interest for such deals and other considerations.

Transparency around information and objectives from GPs earlier in the process is helpful. How GPs approach CVs and communicate with LPs during that process can also impact their primary reputation in terms of raising fresh capital for their fund. More LPs are factoring their CV experiences into their primary underwriting.

5. How do you see the secondaries market evolving? Do you see it becoming a mainstream exit route (for GPs) and/or a fundamental portfolio management tool (for LPs)

We believe that the secondary market, particularly for GP-leds, is here to stay and will only grow, driven by the large volume of unrealized assets in the private equity industry. Secondary market volumes were up 20% year-over-year at $27-32 billion in the first quarter of 2024, according to PJT Park Hill’s latest Secondary Market Insight report. LP deals comprised approximately 65% of the volume compared to a 50% average share from 2020-2023. LP portfolio sales have already become a mainstay and fundamental management tool for investors to rebalance portfolios.

We as LPs will benefit from becoming more knowledgeable and up-to-speed about these growing secondaries tools, while having constructive conversations with our GPs around such topics to create a more win-win situation for all.

Want to know more? Join Chirag at SuperReturn International!