The private equity secondary market is booming as investors recalibrate their portfolios.
The value of PE secondary transactions reached $57 billion in the first half of 2022, breaking the previous first-half record of $48 billion in 2021, according to the latest global secondary market report by Jefferies. The firm estimated that total PE secondary transaction volume will surpass $120 billion by the end of the year.
The value of activity by just limited partners grew to $33 billion in the first half of 2022, up 74 percent from the same period last year. Part of the reason that investors have been selling their stakes is that they have ended up being over-allocated to private equity as the value of their public stocks has fallen, according to the Jefferies report.
The rise in selling has led to a decline in secondary pricing. According to Jefferies, the average winning bid of secondary private equity stakes was 86 percent of net asset value in the first half of 2022, down by 6 percent from 2021. The drop in NAVs is a change from the persistently high secondary prices seen last year, despite an increase in selling, which was listed as a top concern of investors in an April survey conducted by Eaton Partners.
“Public markets declined meaningfully in 2022 year-to-date, but for the most part you haven’t actually seen write-downs in private portfolios,” said Andy Nick, managing director at Jefferies’ private capital advisory team. He added that there is a time lag in the valuation of private assets. When the lower second quarter NAVs come out, better reflecting public markets, he said, the pressure on investors to sell might be alleviated somewhat.
The GP-led secondary market has been robust, too. General partners made up 42 percent of total secondary transaction value, according to the Jefferies report. GP-led deals have been heavily concentrated on single-asset continuation funds, which represent about 60 percent of total continuation fund value, according to Jefferies. Since early 2020, investors have grown more comfortable with single-asset deals because it was easier to conduct due diligence on individual companies during the pandemic.
But diversification still matters. “We do think the market will continue to see a lot of single-asset deals, but maybe with a little bit more balance toward multi-asset continuation fund deals, as well,” Nick said. Besides the impact of the pandemic, investors today are also concerned about the looming recession, persistent inflation, rising interest rates, and geopolitical tensions. “You just have buyers [who are] more cautious, [who are trying to] make sure that they’re not catching a falling knife [with] any companies that might be extremely impacted by everything that’s going on in the world today,” Nick said.