Takeaways from SuperReturn International
Nasdaq Fund Secondaries recently attended the SuperReturn International conference in Berlin. We joined more than 4,000 of the world’s most influential General Partners (GPs) and Limited Partners (LPs) to examine the latest opportunities, challenges, and projections for 2023 and beyond.
Here are some of the trending topics from this year’s event.
Fundraising Meets Secondaries: Solutions for GPs Navigating the New Market Environment
One of the core challenges facing GPs in the “new normal” market environment is capital constraints from allocators, leading to longer fundraising periods (2x as long compared to the five years prior, according to panelists). Panelists also noted that this dynamic is compounded by the fact that there are more managers in the market raising funds than in previous years, which means LPs have more choices when it comes to timing and product. And with continued roadblocks on the path to exits, GPs are looking to the secondary market to either wind-down tail-end funds or crystalize returns and generate distributions to investors in more recent vintages.
GP Stakes: What are the Market Drivers? Is the Market Growing Faster than Funds Can Invest?
GP stakes as a strategy has begun to hit its stride, with market dynamics shifting favorably. Not only is there growing acceptance of GP-stakes deals in the broader market, but there is a growing understanding of what these deals mean for the portfolio GPs, with drivers varying widely depending on their position in the market. Some managers use the capital to invest in growth areas, while others use it to provide partner liquidity or to help with succession planning.
Panelists highlighted both quantitative considerations (such as the amount of capital available in GP stakes deals vs. investable dollars, market volatility, a decrease in the ceiling of valuations, etc.) and qualitative considerations (such as the GPs’ underlying portfolio companies, the overall growth prospects of the business, etc.) when evaluating investment opportunities – for the fund and portfolio GPs alike. And while the space remains highly specialized, with deals requiring the right balance and customization to achieve the objectives of each side, panelists agreed that this segment of the market has room to run.
The Rise and Rise of GP-Led Deals: The Secondary Market Will Be Critical as the Private Market Continues to Grow
Panelists stressed that as record amounts of capital pour into private markets, GPs are more focused than ever on liquidity solutions for LPs, the need for which has been thrust into the spotlight over the past year. During a panel discussion, one GP mentioned that they have experienced a record demand for liquidity from their investors, followed by nodding heads from most other sponsors on the panel and in the audience.
While the recent secondary market has been dominated by LP-led deals, due in large part to the denominator effect, slowdowns in distribution activity and fundraising by anchor managers have led GPs to view secondaries as an integral tool in their kit as well.
Here are a few of the noteworthy developments in this space over the past 18 months, according to the panel:
- The Proliferation of Fund Continuation Vehicles (FCV) Deals – Transactions in which an asset, group of assets, or portion of assets is moved from one or more funds to a new “continuation vehicle” is largely a proxy for sponsor-to-sponsor transactions (a market that is currently challenging).
- Generating Distributions to Paid-In Capital (DPI) for LPs- In Q4 2021, if an asset was high quality, GPs wanted to hold onto it. Now, there is a second motivation- to generate DPI for LPs. We are seeing a greater mix of quality assets but greater failure rates as well. Pricing remains the main challenge for deals today. Some GPs are looking at alternatives if they do not want to take a discount, such as Net Asset Value (NAV) loans.
- Comparing the Competitive Environment for GP-Led vs. LP-Led Deals Today- GP-led deals are less competitive in this environment because they are inherently more complex. There are unfavorable supply and demand dynamics at play, with one panelist quoting that around 75% of dry capital is aimed at LP-led deals. 70% of managers have still not done a GP-led deal, but 90% of those who have, say they would do another. Currently, not all deals are attractive, so there must be a good value creation story. Buyers are also looking for real alignment with GPs (GP are often asked to make a significant commitment to the new vehicle). However, there are several new entrants into the GP-led market. Many GPs are dedicating teams to secondaries, and current conditions have led to a creative, dynamic market in terms of GP-led solutions.
So, what advice do panelists have for GPs interested in pursuing GP-led transactions?
- Ensure you have aligned interests with LPs and especially with buyers.
- Use continuation vehicles to maximize price vs. new financing package.
- The rationale for a deal must be an extension of your established strategy.
In today’s ever-evolving market, what does the future hold for the GP-led? Panelists had the following takeaways:
- Fund financing will go to $50bn, and we will see more solutions for liquidity.
- The market is still young, and as it matures, there will naturally be new entrants on the buy side. More GPs will utilize GP-Leds as a solution going forward.
- On the LP side, there is a lot of pent-up supply, and pricing is starting to come back together, which will lead to a glut of volume.
- There will be innovation and creativity, greater dispersion of returns, but some secondary fund managers will not survive.
Secondaries: What Has Changed, What Is Driving Change, and Where Is the Market Headed?
The conference wrapped up the discussion around liquidity with an engaging conversation about where we are now and where the market will go next. Some of the key discussion points were:
- Headwinds Affecting the Secondary Market: Panelists noted that we are in an interesting buyers’ market, and pent-up liquidity needs remain on both sides. 2021 was too good of a year for LPs, who entered 2022 over-allocated and distributions dried up, but there is an expectation that the floodgates will open in the second half of 2023. In response, GPs are using the secondary market to generate liquidity, and FCVs are providing some of that much-needed liquidity when the exit market is shut.
- Undercapitalization: Split views on capitalization persist. Over the last two years, $240bn was deployed, but only $120bn was raised. One panelist projected dry powder to have only eight months remaining and predicted that in this difficult fundraising environment, secondary managers would not be able to recapitalize very quickly.
- Deal Flow in Traditional LP-Led Market: It is a rich environment for buyers who have the ability to set terms and target the best managers. Discounts have been large over the past year and are thought to stay favorable for buyers over the next 6-12 months but are tightening from lows. Competitive intensity is increasing on the LP-led side, but this may be a short-term trend.
- Deal Flow in the GP-Led Market: GP-led deals are higher priced, but that might be changing.
- Valuations: In defense of private market valuations, one panelist noted that private equity in normal environments is undervalued in comparison to its public counterparts. When public markets are down, private equity typically reflects a few percentage point gain. Additionally, the public market rebound is causing the buffer in private equity to be rebuilt, as valuations are returning slower than public markets.
- Volume: There was a debate among panelists about whether fundraising would be difficult or record-breaking. On the latter end, panelists believed fundraising would continue to be strong and that we would see the often-quoted $1 trillion in volume by 2030.
While tension clearly remained amongst GPs as fundraising challenges continued, the tone of the event overall was overwhelmingly positive about the future of private markets. Innovations in product, structure and technology demonstrate the adaptability of this space, and we look forward to seeing the evolution.