Takeaways From IPEM Paris 2023

Nasdaq Fund Secondaries attended IPEM in Paris for a week of panels and networking with key players in private capital. This year’s theme “Destined to Outperform” asked attendees to consider “whether the claim of the private capital industry over the past few decades, that private markets are destined to outperform other asset classes, is still holding true”, with an agenda that covered related and timely topics for private equity in 2023.

Below is a synopsis of our key takeaways from the Secondaries Summit.

Panel: Big Picture in Secondaries

Appeal of Secondaries: This panel featured a broad representation from the industry, including two buyers, an intermediary and a law firm. The opening panelist started the conversation by highlighting that secondaries are interesting for buyers for three reasons.

• Access to great assets (funds or portfolio companies)
• The ability to re-underwrite an asset
• The ability to use innovative solutions such as preferred equity and other structured solutions

A panelist representing the buy-side also mentioned that the attractiveness of secondaries has led to the emergence of specialization, with dedicated pools being raised for venture, GP-leds, etc. The panel noted that a key theme that has arisen among buyers within the last few years is the ability to take on more concentration risk, thereby providing more liquidity for asset-level deals.

Evolving Regulatory Environment: A panelist representing an intermediary argued that regulators should rethink their position that PE is an inherently illiquid asset and questioned the concept of the “liquidity premium” in light of a robust secondary market. This train of thought could have implications for access to capital from retail investors, should regulating bodies agree.

Efficiency and Transparency: Panelists noted that there remain inherent conflicts of interest involved in a GP-led process to mitigate, necessitating innovation towards a well-organized market and competitive price discovery process for each deal.

Key Themes in the LP-Led Market: This conversation included the view that it is a more efficient market than that of GP-leds, and therefore a better indicator of true market conditions. The quality of the asset is the priority consideration for both sides of the market over discount to NAV. Panelists also mentioned that sellers are smarter than ever before, leading them to hold assets if pricing is unfavorable instead of feeling pressure to sell.

Key Themes in the GP-Led Market: Themes included that it is inherently a less-efficient market due to it being more asset-based, less competitive and therefore less reflective of the broader market. Covid was cited as the first crisis in the GP-led market, and therefore the first opportunity to test the overall market reaction and durability. The take-away agreed by all participants is that *liquidity is always required*, therefore the GP-led market is an “all weather” market.

Other Panel Discussion Comments Worth Noting Include:

• Automation is coming—there needs to be greater efficiency in execution.
• Banks are getting into secondaries, as a portion of the M&A market has likely permanently disappeared.
• Portfolio valuations continue to be challenging and have inhibited total deal volume. Overall large-cap managers are currently sitting out of the market.
• Smaller funds have to create exits and are turning to secondaries.
• $250mm-$1bn deals have proliferated and continue to dominate the market, as opposed to $1bn+ deals.

Trends to Watch in the GP-Led Market

The conversation began with the moderator asking panelists to define “GP-led.” The delineation panelists agreed on at a high-level is that a GP-led deal is done with the manager directly, not with LPs individually. The discussion had a distinctly optimistic tone, with participants agreeing that the GP-led market is here to stay. The GP-led market comprises the fastest growing segment of private equity overall, and GPs are remaining focused on maximizing value and creating liquidity for their investors.

The GP-Led Market Today: A small portion of the deals getting done today involve staples, according to a panelist representing the buy-side. This is because in today’s environment, buyers can be selective with which deals to focus on, so only the most favorable structures are being considered. In general, the most compelling characteristics of a GP-led deal, such as the ability to choose assets, and renegotiate terms such as fees and carry, do not exist with tender transactions. The result, according to panelists, is that 91% of the GP-led market is made up of restructurings today.

Further expanding on the theme of buyer selectivity, one panelist noted that it is currently tough to get buyer attention as they are able to be highly selective with deal focus and deals never hit the market if the terms are not favorable. According to them, the greatest challenge isn’t supply, it is buyer demand.

Market-Drivers: One major factor continuing to drive volume in GP-leds is that traditional exits remain challenging, so there remain a number of high-quality managers with high-quality assets who need more time to realize the full value of their portcos. M&A and IPOs remain difficult, creating a need for returned capital to support fundraising. On the LP side, 80%-90% of investors elect to sell instead of roll because of their inability to diligence asset-level deals. Panelists noted that while the wide adoption of GP-led deals as a tool for generating liquidity continues to be a driver, but also mentioned that many deals are tested that never actually come to market.

Price Environment: A buy-side panelist noted that there is currently very little price competition on single-asset deals because of the limited amount of capital dedicated to this segment. The focus for buyers is setting the lowest possible price that is compelling enough for the deal to get done.

Where Do We Go from Here? Panelists expressed that it is difficult to get large deals fully capitalized today because of challenges with syndication. The sweet spot for deals inked is somewhere in the few $100M’s, as there seems to be wide adoption of GP-led deals with middle-market GPs. On the buy-side, there continues to be a number of groups raising dedicated capital for GP-leds, leading to more specialization in the medium term—more funds will likely get raised over the next 3-5 years. Buyers are not sure where the market is going but are confident it will continue to evolve to accommodate the need for liquidity.

Additional Highlights from This Discussion Include:

• Some buyers love single-asset deals because of the ability to construct a tailored portfolio i.e., cherry-pick best assets for portfolio construction. There is currently more price pressure on multi-asset deals.
• The return of the IPO market is not a threat to secondaries, according to one panelist, who says GP-leds should have an equal share as a tool for generating Distributed to Paid-In Capital (DPI).
• Capital raising for secondary funds continues to be the largest inhibitor to growth, yet opportunities are bountiful ($400 billion - $1 trillion is the targeted size of market in this decade).
• GP-leds are expected to continue to be about 50% of the market, while secondaries should be about 10%+ of total PE market. As an indicator of the durability of the GP-led market, consideration should be given to the explosion of deals during the easiest exit market in history, but all parties need to take into account complexity, and buyers need to be more agile. *Some GPs are planning to do a Fund Continuation Vehicle (FCV) every year.

What would buyers like GPs to know? Panelists noted that buyers focus on quality assets. They also look for solid rationale for deal structure, and they need alignment with the GP on the new vehicle. There was agreement that the GP should commit significant capital to the new vehicle to ensure alignment—buyers love it when GPs are a net buyer in the deal. Panelists also thought that GPs should structure carry as part of the package rather than making it an isolated topic to be negotiated separately.

Resurgence of the LP Market

Will This be a Record Year for LP-Leds? The panel began with the moderator highlighting a number of key market drivers in the LP-led space currently, including the numerator effect/denominator effect, a liquidity squeeze for LPs and sellers being more willing to take discounts (the bid/ask spread is narrow). However, the market remains highly undercapitalized, with 1 year of dry powder remaining for deals at the time of the event. This is a favorable environment to negotiate terms. In other words, it is a buyers’ market.

Here Are a Few Headlines from the Conversation:

• Buyers and sellers are utilizing insurance/leverage to help make negotiation smooth (reps & warranties)and offer a clean break to sellers instead of a preferred equity deal
• Rising interest rates have led to a decrease in pricing and increase in deferred payments
• Considering when deals (portfolio companies) are refinanced is now a big focus in the diligence process
• Earn-outs have been utilized to bridge the pricing gap
• Buyers agreed that tail-end transactions will continue to increase going forward

How are Deals Being Underwritten Today? According to one panelist, there is more dispersion in what is being sold, but older-vintage funds are more attractive.

Another participant noted that there is a preference among buyers for LP-led deals because deals happen at a discount, diversification is your friend, they are able to negotiate deferred payments, and it is easier to do asset selection (fund cherry-picking) as opposed to GP-leds where the assets are predetermined.

Increase in LP-Led Deals: One view was that the increase is due to inherent conflicts of interest w/ GP-led deals. One participant mentioned that this likely isn’t the case, but that LP-led deals will always be the core of the secondary market. One panelist commented that while it is “time to shine” for LP-Leds, the GP-led market is a great complement (reactive vs proactive).

How Do Buyers Support GPs On the Primary End? - Panelists noted that, whether GP or LP-led, buyers have an incentive to establish a productive relationship with the sponsor – and may be required to do so if participating in a tender offer with a staple. As such, many secondary buyers also have pools of capital dedicated to primaries. On the other side of the transaction, GPs are now utilizing the secondary market as a tool for returning capital to existing LPs during fundraising cycles. The wide adoption of this strategy demonstrates the success it has had overall.

Venture vs. Growth vs. Buyout: The general panel consensus was that pricing for venture related dealstends to be very attractive. The proliferation of deals has been small but is a growing piece of the market, with one prediction placing eventual deal flow at 50% of total volume. One caveat was that buyers have to know what they’re doing to properly diligence VC deals due to the asymmetry of information, tying back into an earlier theme of specialization.

How Can GPs Best Position Themselves? To conclude the conversation, buyers were asked for their thoughts on what a sponsor can do to ensure they are able to actively engage the market when the need for liquidity arises. Participants all agreed that the best thing that a GP can do is to be supportive of deals, provide information and be transparent.

Liquidity Remains Top of Mind Across the Universe of Private Markets: This was the consensus from GPs considering more accessible solutions to acquire retail and high net worth dollars, to LPs wondering how they will continue to manage multiple processes at a time without dedicated teams. Each session of the Secondary Summit was “standing room only,” with participants keen to learn more about how the market is evolving and what it may look like in the future.

*Information in this article should not be interpreted as direct quotes from panelists.  

Rory Mabin

Nasdaq

Rory Mabin is an Associate Vice President and the Head of Fund Secondaries at Nasdaq Private Fund Solutions.

Read Rory's Bio