2023 Investec Secondaries Report – Secondaries shine in turbulent times
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How has activity around secondaries changed in the last 12 months? What key trends do secondary fund managers expect to see in the near future? Investec’s Secondaries Report, which canvasses views from 30 secondary fund managers, answers both these questions and more in this year’s report.
For the fifth consecutive year, Investec reveals the key trends driving the secondaries market, with a focus on the use of financing. Findings show a mature and robust market where financing plays a key role, on track to break more records.
Only a year after the onset of the Covid-19 pandemic, the global secondaries market shot up to record volumes in 2021, surpassing $130bn.
The majority of survey respondents believe the main driver behind these corporate acquisitions has been to increase assets under management in a growing market, closely followed by a desire to forge strategic alliances and benefit from institutionalised platforms. To a lessor extent, they attributed recent activity to partners of secondary GPs wanting to crystalise value and to succession planning efforts.
However, market participants are now looking to rebalance their portfolios by prioritising traditional LP trades – how long this will take remains to be seen given the Ukrainian uncertainty.
Although there may be delays due to the macroeconomic uncertainty, the LP market looks set to take back centre stage, with 70% of participants indicating they expect to be more active in this area over the next 12 months.
As the backlog of LP sales that were put on hold unwinds, heated competition for high-quality assets is having a direct impact on pricing.
According to 48% of respondents, this competitiveness is pushing valuations ever higher, while another 21% attribute higher prices to the considerable amount of dry powder still to be deployed.
In order to counteract extremely high valuations, financing has become increasingly essential to transacting in private equity.
The primary use of financing is to enhance returns (73%), with more than half (55%) of respondents targeting unlevered returns of between 15-25% – and nearly half of these aiming for above 18%.
As subscription lines become more sophisticated, this remains the most popular type of financing, recording 97% use. This is has come a long way from the 25-30% of funds that used these facilities five years ago.
While recent geopolitical events may dampen the mood slightly, 80% of participants we surveyed believe 2022 deal flow will exceed that of 2021.
If Covid-19 has taught us anything it is that the secondaries market is stronger than ever and should have no problem withstanding further shocks. Overflowing with liquidity and equipped with more advanced means of financing than ever, this bodes well for the uncertain environment that lies ahead.
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