Though the news on first quarter PE dealmaking is bearish, one corner of the market had a strong showing by deal value: GP-led secondaries. The transactions constituted more than 50 percent of secondaries deal value in the first quarter, according to EY’s private equity pulse.
Demand for GP-led secondaries isn’t going away soon, Jim Bunn, president of Raymond James global equities and investment banking told me previously. The reasons are manifold: Private equity looks to extend portfolio timetables because firms want to rollover equity into a buyer, and are newly subject to that buyer’s hold period; or need follow-on capital for a fully-deployed fund to hunt new opportunities; or want to provide liquidity to investors ahead of a fundraise.
Secondary activity levels have historically been in flux. After steady growth in aggregate funds raised from 2013 to 2016, more recent capital raises have been choppy, according to data provided by Preqin. Only three funds launched during 2020’s presumably favorable climate for secondary investors: funds looking to offload portfolio holdings during Covid faced nearly unprecedented uncertainty from conventional buyers.
Whether the deal type will continue its hold on general partners is anyone’s guess, especially with pending regulation adding more scrutiny to the practice. The Securities and Exchange Commission proposed several new rules regulating private equity, including one that would require third-parties to disclose potential conflicts of interest when delivering fairness opinions over GP-led secondary deals. Read more about the likelihood of those draft rules surviving a recently ended comment period here.