Secondaries: 1H2024 Market Outlook

Key takeaways

• In 2023 we saw a continued search for liquidity which was met by robust buyer demand resulting in the 2nd highest year of closed transaction volume on record: $115bn.
• Traditional exit activity has slowed significantly, driving increased secondary market adoption by both LPs (55% of volume) and GPs (45% of volume).
• As supply continues to outstrip demand, buyers are achieving meaningful discounts (avg. 85% of NAV in 2023) for high-quality, diversified LP-led portfolios.
• Despite record fundraising of $117bn in 2023, growth in closed transaction volume has kept dry powder available to 1.3x closed volume, significantly below other private markets, creating a favorable buyer’s market.

With secondary volume representing only ~1% of total unrealized value in the private capital markets, the potential for continued growth of selling volume is significant. However, the availability of capital seeking secondary opportunities remains quite limited at 1.3x 2023 closed transaction volume. This compares favorably to the broader private equity market at a ratio of 4.5x. This report highlights the increased adoption of the secondary market by both LPs and GPs. With muted M&A and IPO activity, and the growth of active management, the market is presenting an unprecedented opportunity for secondary buyers.

Continued strength in LP-led deal volumes

LP-led transactions maintained their prevalence throughout the year, comprising a majority of 2023 deal volume at 55% or $63bn, with closed LP-led transaction volume growing ~15% compared to 2022. The shift to more diversified transactions that we saw during 2022 continued, as sellers remained focused on monetizing high-quality funds or portfolio strips to manufacture distributions in the face of slower exit activity from traditional sources of liquidity. This can also be evidenced by shifting seller rationale, from portfolio rebalancing & PE overallocation being a leading cause in 2022 to generating liquidity & de-risking being the main consideration area in 2023.

As discussed in our 2H23 market outlook, on the buy-side, we experienced a flight to quality and renewed interest in younger vintages with greater perceived upside (w-avg of 2016 vs. 2014 in 2022), which helped narrow the bid-ask-spread, and was further supported in 2H23 by improving public market sentiment. Ample dry powder from record fundraises across the secondaries landscape also drove buyer interest (theme cont. on page 6), given the immediate diversification benefits of LP-led transactions and their ability to serve as a ballast to more balanced secondary strategies across various transaction types.

As alluded to above, discounts narrowed from 81% in 2022 to 85% in 2023 - with buyout-focused funds continuing to price stronger than other investment strategies.

GP-led deal volumes finish strong to end the year

The search for liquidity seen in the LP-led market has also permeated into the GP-led market and helped drive $50bn+ of closed GP-led transaction volume in 2023, which represents ~5% growth compared to 2022. From a buyer perspective, the bar was raised for GP-led transactions in 2023, with a particular focus on valuation, alignment and performance. From a seller perspective, LPs are increasingly expecting GPs to turn to the secondary market to offer liquidity for investors - as DPI is a key point of scrutiny in a challenged fundraising environment.

Over the year, we saw the recalibration in deal sizing in GP-led transactions, in favor of smaller deals that are more palatable for portfolio construction priorities and come with a higher certainty of close (i.e., less syndication risk). We saw this trend continue through 2023 as buyer appetite remained focused on mid-market opportunities with more attractive deal characteristics, which ultimately helped to narrow the bid-ask spread, with CVs often achieving 85%+ pricing.

The staying power of the GP-led market and its broader acceptance can be evidenced by its growth relative to other traditional exit routes. While sponsor & strategic-backed M&A has historically been the most common exit path for GPs seeking liquidity, followed by IPOs, GP-led continuation vehicles comprised 12% of sponsor-backed exit volume in 2023 (up from 7% in 2022 and 5% in 2021). Further, 2023 GP-led secondary volume represented 76% of peak 2021 levels, compared to IPO volume of 20% and M&A volume of 39% - demonstrating the market's resilience in the face of a challenging macro backdrop.

As we have seen over the past several years, there has been a material growth in the secondary buyer universe and 2023 was no different. Many new and established firms sought to build or enhance their secondary buyside capabilities. Given the breadth of information and relationships typically required to pursue LP-led opportunities at scale, we have seen many new entrants focus their initial foray into the secondary market on GP-led transactions, where there can be fewer barriers to participate.