GPs and LPs tap surging private equity market as portfolio management tool
A surging private equity (PE) secondary market creates a powerful portfolio management tool.
Private equity general partners (GPs) and limited partners (LPs) are increasingly leveraging the PE secondary market as a multiuse portfolio management tool in a way that not long ago simply did not exist.
Whether the aim is to provide quicker liquidity, an avenue to rebalance a fund, realize healthy risk-adjusted returns, opportunities for a diversification or other purposes, the secondary market is surging – and more of the same is expected in 2019.
In the 2013 – 2018 period, annual deal volume in the secondary market has grown 163 percent, from $28 billion to $74 billion, and has produced a compounded annual growth rate of 21 percent. KPMG and other industry participants expect deal volume in 2019 to increase by at least 25 percent, compared to the 2018 level.
The attraction of the secondary market
Unlike committing to a blind pool of capital at the inception of a PE fund and subsequently relying upon the skills of a portfolio management team to make sound investment decisions, “a secondary investment allows for the ability to evaluate and commit capital to a more mature investment portfolio,” says James Suglia, KPMG’s National Practice Leader – Alternative Investments.
The evolving secondary market
Originating from a way for LPs to cash out of funds that had exceeded their 10-year lifecycle, the number of GP-led transactions has increased significantly in the past six years, providing a mechanism to package late-stage portfolio investments for sale in the secondary market. This current activity is a marked departure from traditional LP-led transactions to an evolution led by GPs that effectively are creating an entire new – and trusted – asset class.
With volume comes transparency…and pricing impacts
A contributing factor to the rise of GP-led transaction in recent years is the increase in secondary players entering the market. As secondary market entrants crowd the field of potential buyers, a more efficient market has emerged, allowing for greater transparency into the auction process. The effects of a more efficient market translate into increased pressure on pricing and portfolio returns.
3 P’s to a successful GP-led transaction
While no deal is the same, and each presents its own set of challenges, we subscribe to the notion that the keys to a successful deal lie in the three P’s: People, Product, and Price.