Investec’s Annual Secondaries Report 2021: Key findings

For the past three years, Investec has conducted research looking into key trends within the secondaries market and the expected changes. The research is derived from speaking to 44 secondary fund managers from across the globe. A number of professionals also took part in in-depth interviews and conversations to provide further context.

In last year’s report, we saw the early impact of Covid-19 on the secondaries market. Transaction volume was down and buyers were looking for larger discounts to NAV, mainly to compensate for the additional market risk.

One year on, although still in the middle of the Covid-19 pandemic, confidence in the return to a more familiar level of market activity is increasing due to global vaccination programmes being rolled out. However, this year’s report does outline that there are still some areas of concern.

Head of Secondaries, Ian Wiese commented: “The secondaries market continues to evolve and, whilst it has not escaped the effects of Covid-19, neither has it suffered the long-term impact some feared.”

This year’s report outlined that more than three-quarters of secondary fund managers believe deal flow will return to 2018 levels with the next 12 months. Despite the recent slowdown, managers remain upbeat about the sector’s longer-term prospects, with none of those surveyed expecting this return to take longer than 24 months.

Wiese again mentioned: “LPs haven’t faced the same liquidity crunch that they did after the Global Financial Crisis, so they’ve been able to bide their time. As a result, there is a backlog of deals that we expect to progress throughout 2021 and beyond.”

GP-led solutions stand firm

GP-led solutions have proved particularly resilient, with more than two-thirds (69%) anticipating further growth in this area and just 3% expecting activity to decrease. This represents a large part of all secondary market activity: 86% of respondents participate in GP-led solutions, and GP-led activity accounts for 39% of participants’ total activity. One-third of those that currently do not participate in this area expect to do so within 12 months.  

Single asset deals are becoming an attractive option for GPs looking to hold onto their best assets, with two-thirds of respondents indicating they would consider deals with only one asset. While three quarters (74%, up from 50% in 2019) say this in the context of GP-led transactions, as one might expect, this trend has extended into the world of LP portfolio sales, with 68% saying they would consider deals representing only a single LP position.

Preferred equity solutions almost universal

Ten years ago, involvement in preferred equity solutions was seen as a niche activity for managers in the secondaries market. However, this year, only three managers were not participating in this area, and all of them said they expect to become active in the next 12 months.

However, while many areas are growing, others are declining. Managers that participate in tail-end portfolios have begun to step away from this area, with 19% saying they expect activity to decrease or stop entirely. This year’s report highlights that the largest discounts appear to be within tail-end portfolio transactions, with an average of 63% of buyers requiring a discount of 30% or more.

The growth of NAV financing

84% of secondary managers currently use financing or liquidity solutions at the fund level, a similar number to 2019 (86%), with the most popular being subscription finance/capital call facilities and asset-backed financing including hybrid facilities (for acquisitions or dividend recaps).

With exits becoming more difficult in the current market environment, we may see more managers starting to use NAV financing solutions to deliver liquidity to investors, as well as to provide capital to their portfolio for either defensive or opportunistic reasons.

Looking ahead, the consensus among the managers surveyed in this year’s report is that there are plenty of reasons to be optimistic. Deal flow may have slowed down in some areas when the impact of Covid-19 was beginning to be felt, but 77% think they will see dramatic improvement within 12 months.

Additionally, the secondaries market continues to evolve. Investec head of origination and NAV financing, Jon Harvey agreed: “Creativity in the secondary market is increasing rapidly. Advisors and GPs alike continue to find innovative ways to put capital to work. Financing solutions need to keep apace and lenders will be asked for a range of different options for different portfolios and situations.”

Ian Wiese concluded with his thoughts ahead of a pivotal year for the secondary fund space: “The trend towards hybrid and increasingly complex transactions is sure to continue, with the increased blurring of the worlds of primary and secondary inevitable. What were once distinct categories – traditional secondary sales of LP portfolios on the one hand and primary deal-making on the other – are no longer either of those things. 

“At Investec, we continue to work with all manner of market participants, across the cycle, supporting them at the fund and transaction level.”