The recent explosion in general partner-led secondary deals has a corollary on the limited partner-led side, Kline Hill partner Jared Barlow tells Mergers & Acquisitions. Investors sidelined by the pandemic are back. Limited partners are disposing of assets in the $100+ million range to align portfolios with targeted sector and geographical exposure, and the pace of dealmaking is picking up.

It’s a switch that’s a boon to upper middle market LP-led transactions. Smaller deals below the $100 million threshold tend to remain consistent through market cycles, with swings in larger deals accountable for most of the market’s choppiness. That is usually LP secondary acquirer Kline Hill’s sweet spot, backed by its $1.5 billion in assets under management. Smaller deal flow held up during the pandemic as well, says Barlow, with a notable exception.

“Last year, we did see some distress at the small end of the market,” Barlow says. “We saw that among some family offices that may have a private company that’s more negatively impacted by Covid, and becomes a motivated seller. We saw a number of those deals in Q2/Q3, in smaller deals below $40 million.”

Now brokers and LPs are largely pitching deals to sell their interests for portfolio management reasons. It’s a trend that’s becoming ubiquitous: only 23% of LP respondents to Coller Capital’s Global Private Equity Barometer survey said their portfolios would have no exposure to secondaries. The pickup in activity is creating opportunities for niche acquirers to pounce. 

“I would say overall we think at the small end of the market there’s a wider range of discounts available to buyers,” Barlow says. “Fewer buyers are willing to chase small deals given the time and resources required, but at Kline Hill our focus is investing in that small deal niche. In certain portions of the market, finding the right asset is the name of the game. That’s hard to do in large auctions.”

That interest might be as narrow as a thesis on a single company.  

“We’ll target funds in LP secondaries to get exposure to companies we really like,” Barlow explains. “As we get smart on an asset, we’ll look for that asset on various funds, and we seek out sellers.”

Barlow also weighed in on limited partners’ expectations for more churn in their GP investments. Limited partners are more likely to turn down general partners’ new funds than in the past. Just over 40 percent of respondents — surveyed from February to March — said they are less likely to invest in successor funds.

“We’ve been hearing from market participants, especially those investing in private markets for quite a while, that they have a long list of managers where they are re-upping as GPs are now coming back faster and asking for more capital,” says Barlow. “As such, many LPs are also concentrating their dollars with fewer managers, and decide not to re-up with non-core managers. These funds are often offered on the secondary market and provides strong deal flow for us.”

GP-led deal flow is increasing. Whitehorse Liquidity Partners’ $4 billion secondary fund closed $1 billion over its target in April, the latest anecdotal evidence that the secondary market is heating up.

But for all the recent press on the rise in GP-led secondary deals, the surge is a phenomenon best considered alongside its historical lumpiness. After steady growth in aggregate funds raised from 2013 to 2016, capital raises have been choppy, according to data provided by Preqin. Only three funds launched during 2020’s presumably favorable climate for secondary investors.

The mundane business of portfolio management might give the LP-led side of the secondaries market a bit more consistency.