How are LPs transforming the secondary market?

On 6 March, the first ever SuperReturn Secondaries Europe will convene the Hilton Bankside in London, making it the only event focused solely on the European secondaries market. Ahead of the event we spoke to Bertrand Chevalier, Senior Managing Director, Secondaries & Primaries, Ardian about his way into the secondary market, how LPs are transforming the space and what the future prospects look like.

I joined Ardian’s Paris office back in 2006, right after my graduation, where I was involved in various roles internally before joining the Secondaries and Primaries team in 2011, eventually moving to London in 2013. Over the course of 11 years, I have transacted on a range of LP-led portfolios, from small to multi-billion dollar deals and strategic operations spinning out teams, and more selectively on concentrated portfolios.

Since Ardian raised the first ever Secondary fund in 1999, we have witnessed a transformation of the secondary market from a small niche characterized by distressed sellers and steep discounts, to an active marketplace with sophisticated buyers and sellers. From the very start, Ardian’s core strategy has been to acquire large, diversified, portfolios of LP interests exposed to the crème de la crème of Buyout funds in Europe and North America. That strategy continues to be successful today – we have deployed more than $50bn in Secondary volume over the past 5 years alone.

In recent years, the Secondary market has seen impressive growth, with transaction volumes rising from $37bn in 2016 to over $100bn in 2022, largely driven by the increase volume of commitment raised by the PE industry and by the LP community taking a more proactive approach to managing their private equity allocations. Moving into 2022, numerous LPs encountered a numerator challenge whereby their private investments were drawn down more quickly than anticipated and outperformed expectations. This led to the denominator effect as economic difficulties caused public market valuations to drop far more than private market equivalents, in addition to delaying exits for many companies. Through all of this, GPs were not dissuaded from attempting to raise new capital, and in 2022 a majority were competing for and raising capital, albeit at a much slower pace. All said – LPs are facing an allocation crisis.

The natural consequence of the above trends has been for a buyers’ market to flourish, and we estimate that over $200bn of secondary opportunities brought to the market – a record number, although only half ending up transacting. On top of that, studies show that roughly half of the selling LPs in 2022 were first-time sellers. Our experience shows that once an institution uses the secondary market, they tend to become repeat sellers.

In this selling environment, LPs are increasingly looking to innovate and consider more complex portfolio constructions, offer significant free deferred payments and flexible pricing options, and accept mosaic solutions. Approximately 50% of sales in H2 2022 being acquired by more than two buyers, a record high over the last three years and a trend that is expected to continue in 2023.

Of the LP portfolios currently observed in the market, their make-up has shifted with the majority now consisting of very young vintages with significant upside potential – as expected, pricing for newer funds, where exits are projected to be many years in the future, was not as affected by buyers’ view that 2023 will be a challenging year for realizations.

In addition, LPs are looking to free up deployment capacity and lower effective fee costs by divesting non-core GP relationships in order to participate in their core managers’ latest vehicles and gain preferential access to fee-free co-investments.

Looking further to the future, the picture continues to look bright. The continued popularity of Private Equity as an asset class will serve to drive underlying growth in the LP led segment of the market. And there’s the increasing trend of using technology to drive advanced data analytics, allowing LPs to better understand their portfolio and bring larger and more sophisticated deal flow to market. Ultimately, increasing requirements for pricing and faster price discovery will favour the largest, most established, players in the market.

As we enter 2023, we see attractive supply / demand dynamics resulting from new opportunities generated by LPs, first-time and repeat sellers alike. Based on this, we anticipate that 2023 will be a year of exciting growth for the market, continuing its strong trajectory in the long term.

Sources:
ARDIAN Internal Data
Evercore 2022 Secondary Market Synopsis
Park Hill Private Equity Market Overview – Q1 2023
Lazard Secondary Market Report 2022

Want to learn more? Secure your spot for Secondaries Europe and join Bertrand's session to learn more about the LP-led renaissance in the secondary market.