The pipeline is full for secondary deals in 2024

Secondaries investors are anticipating another banner year in dealmaking in 2024.

After an active year in 2023, the ever-shrinking bid-ask-spread between buyers and sellers on the secondary market and a persistent demand for liquidity are setting the stage for another bustling period for secondary transactions.

“Advisors in the market have been talking to potential sellers for the last 12 months who are really keen to come to market,” said John Carter, CEO of Hollyport Capital, a London-based investment firm that specializes in PE secondaries. “It’s just about having confidence to initiate the process, and I think that confidence is growing.”

Secondaries gained traction in the market, in part, because of liquidity concerns for LPs in a lethargic exit environment. Other than Q2 2020, when the Covid-19 pandemic sent the world into lockdown, Q3 2023 marked the lowest quarterly figure for US PE exit activity in over a decade, according to PitchBook data.

Secondary market products like continuation vehicles allow GPs to hold onto portfolio companies and provide payouts to LPs. In 2023, Blackstone raised $2.7 billion for its first GP-led continuation fund strategy and Insight Partners closed its third CF at $1.3 billion.

However, the market has faced its own headwinds. A stubborn disconnect on pricing expectations between buyers and sellers led to a 25% year-over-year decline in total global secondary market deal-making in the first half of 2023, PitchBook previously reported.

Still, deal volume remained elevated compared to pre-2021 figures and investors reported a shrinking bid-ask spread in the second half of the year.

A look ahead

Robert Emerson, partner in the PE and private investment funds practice at law firm Goodwin, expects the liquidity demand to persist in 2024. This, paired with a shrinking pricing disconnect on secondary sales, will encourage continued deal activity in the asset class, he said.

“I don’t see any reason why the market for next year won’t be just as voluminous as this year, if not increased in size,” Emerson said.

Carter said the mounting agreement on pricing is a product of increased investor confidence in the underlying value of the assets.

Inflated valuations have been a concern for investors since 2022, when a decline in public equities paired with persistently high private market valuations destabilized institutional portfolios. Since then, private market assets have undergone a correction.

“If you go back 12 months, people were very nervous about valuations, and what we’ve seen across our portfolios over 2023 is a steady hardening of valuations,” Carter said. “So people have gotten more comfortable with valuations and on the back of that, they’ve gotten more comfortable to trade.”

Carter said he expects Q4 2023 to be a record quarter in secondaries deal volume, and agreed this momentum will carry into the new year.

Aggressive fundraising for secondaries-dedicated funds will also contribute to the robust pipeline in 2024. In the first nine months of 2023, fundraising for vehicles dedicated to secondaries beat totals for every year except 2020 with a total of $681 billion in 39 funds, according to PitchBook’s Q3 2023 Global Private Market Fundraising report.

GPs with large funds dedicated to secondaries will look to deploy their dry powder in 2024, said Mina Pacheco Nazemi, head of diversified alternative equity at Barings.

“Our conversations with peers, GPs and advisors lead us to believe there will be more secondary deal flow in the coming year as several firms have raised larger funds to be deployed in secondary transactions,” Nazemi added.

This year’s capital raising activity was driven by a small number of key players. Nearly 70% of 2023’s total secondaries capital was raised by four mega-funds, which all closed above the $5 billion market.

In January, for example, Blackstone raised the world’s largest secondaries fund. The $22.2 billion for its Strategic Partners IX fund is dedicated exclusively to helping LPs and GPs offload assets on the PE secondary market.

More LPs foresee opportunities for GPs in the secondary market than in the traditional buyout market, according to a survey of 110 investors in PE funds by secondaries investment firm Coller Capital . Over three-quarters of respondents said they’re anticipating strong opportunities to arise in secondaries over the next two years.

This figure contrasted with the 11% of respondents who said the same about opportunities in mega-buyouts.

“The cashflow distribution profile that many investors experienced from PE for a long time hasn’t been the case for a couple of years,” said Eric Foran, partner at Coller Capital. “So I suspect the secondary market will be very helpful to investors in managing their portfolio’s distribution profile, and that’s going to be from a mix of both LP-led and GP-led secondaries.”

Foran said he knows of several GP-led transactions lined up to take place in Q1 2024 and sees pent-up demand on the LP-led side as well.

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