GP-led secondaries: Evolution and opportunity

Earlier this month, Amyn Hassanally, Partner, Global Head of Private Equity Secondaries, Pantheon Ventures, took the stage at SuperReturn North America to discuss the secondaries landscape. Amyn is a Partner and Global Head of Private Equity Secondaries. Prior to joining Pantheon Amyn was an Investment Partner at Coller Capital, where he worked for 17 years in both London and New York and was formerly the global Co-Head of Investment Execution.

Amyn explains why GP-leds are here to stay and how to understand and assess these transactions. Read on to find out more, and take a look below at our exclusive onsite interview with Amyn!

Secondaries have topped $100bn in annual transaction volume over the past two years with growth coming not only in private equity, but also in the rapidly evolving secondaries markets for infrastructure and private credit. Despite a slower start to the year in 2023 as pricing expectations adjusted to a new market environment, deal flow has continued to be robust and intermediaries are predicting that the market could top $100bn for a third consecutive year.

Within secondaries, the GP-led market has been a key element in the growth witnessed in recent years, having seen a 10-fold increase from around $5 billion in transaction volume in 2013 to around $50 billion in 2022. What’s more, existing LPs in private equity funds appear to be increasingly on board with these transactions, with a majority of LP respondents to a Capstone Partners survey this year stating they would rather sell into a GP-led secondary now than hold and wait for additional upside on their investment. This builds on figures published by Lazard in 2022, which estimated that the average sell-side volume of existing LPs into continuation vehicle transactions was 90%, an increase on prior years.

Secondary solutions

A catalyst for GP-led deals in the current market has been the disruption of traditional exit routes for private equity-backed companies, which dropped markedly in 2022 following a record year in 2021, and which have remained subdued through 2023. The IPO market, the SPAC frenzy and previously buoyant M&A activity have all faced significant challenges relating to factors such as rising interest rates, geopolitical tensions, regulatory scrutiny, and market volatility.

Overall exit volumes were down over 50% from 2021 to 2022. Meanwhile, buyout funds are currently sitting on two times the amount of unrealized assets that they were in 2018. What this means in practice is that many GPs have found themselves holding onto mature assets that still have growth potential, but with limited options to monetize them.

For assets held in older funds that are approaching the end of their lives, this dynamic brings additional pressure to find a solution that would offer a liquidity option for LPs, while not requiring the manager to exit at what they believe to be sub-optimal pricing. The secondary market offers that solution, allowing GPs to sell their assets to a new vehicle, typically backed by new secondary investors, and to offer their existing LPs the choice to either cash out or roll over their stakes.

GP-led deals are not merely a reaction to the current market environment, however – and in fact, the more traditional secondary option of buying fund stakes from existing investors has been attracting much more attention in recent months. Rather, GP-leds are a function of the evolution and increasing sophistication of the private equity – and secondary – market that solves for fundamental limitations of the private funds model. GPs have been utilizing this secondary market solution with respect to their “trophy assets” in particular, as they can require more time and capital to maximize value, which continuation vehicles can provide.

GP vs LP-led secondaries

So, what are the key considerations for investors with GP-led deals compared to traditional LP-led deals?

To begin with, GP-led deals are more concentrated and asset-led, focusing as they do on backing a specific company or a small group of companies with a proven track record and a clear growth story. They also have more back-ended cash flows, as the buyers are betting on the future upside of these select assets rather than buying into a broader portfolio that will provide immediate distributions.

For these reasons, we believe it can be instructive to compare GP-led deals to buyouts, as both have a similar growth and return profile, and ability to generate alpha. However, GP-led deals still have all the core risk mitigants of secondaries, in that investors are buying into mature and visible assets, and backing the same GP and management team with a continuation of an existing and proven strategy.

The maturation of the market and growth in deal flow has also come hand in hand with a general shift to higher-quality assets, as managers and investors recognize this as a more mainstream liquidity solution. For us, we consistently seeing high-quality GPs – and for us, often GPs we know well and have partnered with previously – bringing their highest-quality companies to market.

Evaluating GP-led deals

When assessing GP-led investments, one key element is to understand the transaction rationale. Why is the GP bringing this asset or group of assets to the market, and why is a continuation vehicle the best option for them? The rationale should always be driven by the potential of the asset rather than by the liquidity needs or fundraising challenges of the GP.

Alignment of interest is also crucial, as it ensures that the GP is committed to the success of the deal and the asset. The GP should be more of a buyer than a seller of the asset and should invest in the new vehicle at the same entry price as the secondary buyers.

The valuation is another vital piece of the puzzle, as it determines the attractiveness of the deal from a return perspective. The valuation should reflect the quality and the growth prospects of the asset, as well as the market conditions and the competitive dynamics of the deal. It should be reasonable and not inflated by unjustifiable write-ups just before the transaction.

We have always liked to see independent valuation opinions – or better yet, a fully independent process – to give additional confidence in the pricing. We also routinely leverage our broader platform and knowledge base of the GP and, where we can, the specific assets, to understand if there is embedded value that is not being fully reflected in the purchase price. Our platform’s extensive relationships with GPs often provides us with knowledge of a given manager’s valuation methodology and past practice in marking assets up or down, which can be very helpful in assessing valuation and pricing for specific assets.

Looking to the future

We continue to see robust deal flow in the GP-led market and expect that Q3 and Q4 numbers will look stronger than the first half of the year. With the underlying drivers for GP-led deals still being as relevant now as they ever have been, we further believe this growth story will continue beyond this current market cycle – although, the current vintage will create some especially attractive buying opportunities.

More than anything else, we continue to believe that, when done well, these deals are a win-win-win for all parties, providing a solution for GPs wanting to realize the full potential of their investment, existing investors in need of liquidity, and secondaries investors with a mandate to identify high-quality assets with the aim of generating attractive risk-adjusted returns.

Want to hear more from Amyn Hassanally? Watch below to hear more on the current state of the GP-led secondary market, what Amyn looks for in a GP-led secondary process as an LP, and the future of trophy companies!

To register for next years event, head to the SuperReturn North America website now!