For the sixth consecutive year, Investec reveals the key trends driving the secondaries market, with a focus on the use of financing. Findings show a strong and resilient market, capable of growth in turbulent times, providing a reliable avenue for investors to access liquidity.
Shifting macro winds
The past year has been marked by runaway inflation, surging interest rates and economic and political uncertainty. This has exerted acute pressure on market liquidity, resulting in both LPs and GPs turning to the secondaries market as a route to access liquidity, displaying the strength of the market which continues to be resilient.
In 2022, the market showcased its strength by surpassing a transaction volume of over $100bn1 – the second-highest level ever recorded; the driver continuing to be LP-led deals ($55bn) and GP-led deals ($48bn).
1 Evercore Private Capital Advisory, 2022 Secondary Market Survey Results
Fundraising: Sizing the opportunity
Our reports shows that the fundraising market for secondaries is expected to remain buoyant, despite the expectation of capital constraints to result in a slower fundraising market across all private equity sub-asset classes.
More than 90% of secondary managers we surveyed are looking to fundraise in 2023 – demonstrating high expectations for the size of the opportunity in secondaries. Looking forward, respondents do not foresee this slowing down, providing an opportunity for buyers to hopefully take advantage of a rise in expected deal flow, leading to increased deployment.
The new rate dynamic
Despite rising interest rates, our research found there is still appetite for financing in the secondaries market. More than three-quarters (77%) of managers said they expect their use of debt financing to remain the same in 2023.
In the current environment, secondary managers are employing different financing strategies, whether that be at the fund level or a combination of fund and deal level financing.
The report found that respondents using debt to finance LP-led deals increased to 46% compared to last year’s 30%. When compared to deal-based financing for GP-led transactions, there has been a substantial jump from 10% in the previous survey to 31% in this year’s report.
Adapting deal terms
Reflecting the environment, GP-led financing is typically structured on shorter tenors, with 63% of respondents opting for under 24 months. By contrast, only 18% of LP-led transactions are conducted on loans of less than two years. Furthermore, the survey showed that 82% of LP-led deal-based financing was above 24 months.
While private equity secondaries are not immune to disruption, the market continues on its long-term growth trajectory.
Financing within secondaries is rising to the challenge of high interest rates – and appears to be holding strong. Until now, in an ultra-low-rate environment, growing demand for debt was almost a given. However, this year’s survey results prove it has an enduring appeal for GPs across the cycle.