Takeaways from Kline Hill Partner's Secondary Day 2024

Nasdaq Fund Secondaries attended Kline Hill Partners’ Annual Secondary Day in Manhattan, hosted by Evercore. This year's event drew over 150 participants from leading buy-side institutions, sell-side advisory and secondary fund managers, who raised over $100K through charitable donations for The Alzheimer’s Association. 

Panelists from Campbell Lutyens, Harris Williams, and Evercore discussed notable trends in the market in 2024. These are our key takeaways from the meeting:  

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

Private Wealth

Panelists opened the discussion with a conversation about the growing significance of ’40 Act funds, highlighting how more private equity firms are leveraging these funds to reach a large and relatively untouched segment of retail investors. Through ’40 Act funds, retail investors can gain exposure to the private markets without the extended holding periods and prohibitive minimum commitments typically required by traditional PE funds.  

’40 Act funds typically have monthly subscriptions and quarterly (or periodic) redemptions- allowing managers to invest regularly, deploy capital quickly and provide more liquidity to investors than a traditional PE fund.  

There was consensus that we are at the beginning of the retail trend- and although there does not seem to be a significant impact on pricing today, the dynamic will continue to evolve. Panelists noted that some ’40 Act funds will have up to 50 percent of capital designated to secondaries. Their participation as buyers will likely lead to increased price competition, since managers are under constant pressure to deploy capital and will often take a “by all means necessary” approach to acquiring interests. 

The GP-Led Market

The GP-led market was active in early 2024 - building on momentum from the second half of 2023 in an environment more conducive to closing deals. As bid-ask spreads narrowed, sellers took advantage of the favorable conditions.

Demand for liquidity grew as M&A continued to be slower than expected. GPs, preparing for 2025 fundraises, aimed to return capital to investors to support future growth – many are working on wind-down plans for older vintages.

Large cap GPs used multi-asset and selective single-asset continuation vehicles to provide portfolio liquidity and extend holding periods for top-performing assets. They see restructurings as a capital formation strategy as dry powder is depleted or they reach concentration limits in existing portfolios. One trend of note is that there has been an increase in family offices and traditional LPs dedicating pools of capital to CV deals – a trend many panelists agreed is likely to continue.

Continuation Vehicles (CVs) performed well in 2024

CVs, a tool that allows GPs to roll assets from existing funds into a new investment vehicle, have performed well- accounting for the majority of GP-led transactions in the first half of 2024 (86% according to Evercore H1 2024 Secondary Market Survey). When asked about this performance and what to expect going forward, panelists commented on the constructive environment, with risk appetite ticking up for CVs as they become more mainstream. 

As was the case in the previous year, there was a focus on high quality, resilient assets- GPs want to hold on to “winners” longer. As for the demand side, deals were generally well capitalized, but appetite was inconsistent quarter to quarter.  

The LP-Led Market 

Panelists expect the LP-led market to continue to grow, with a lack of DPI driving willingness to sell and an increase of first-time sellers from 39% in 2023 to around 45% in the first half of 2024 (Jeffries H1 2024 Global Secondary Market Review). 

Panelists commented on the “perfect storm” of willingness to buy and sell creating a healthy environment for secondary opportunities. On the demand side, the number of new entrants to the secondary market as well as the rise of ‘40 Act fund AUM contributed to the growth of LP-led deals. 

On the topic of CVs- it was noted that LPs recognize that CVs are part of the new normal and are more inclined to evaluate opportunities on a case-by case basis, rather than opt to automatically roll or sell, as they did in previous years. 

Private wealth investors have been drawn to the liquidity of LP-led deals, leading to an increase in prices due to the surge in participation from private wealth capital.

Buy-Side Sentiment

The panelists agreed that the most compelling dynamic in the current environment for buyers is that for GP-led deals, there is more supply than demand. There are opportunities in the middle market with great assets managed by lesser-known, smaller managers. On the LP side, while pricing has increased, the quality and variety of funds are also on the rise.

Regarding deal financing, panelists observed that GPs employ financing more frequently than LPs, and deferrals are commonly used to bridge the bid-ask gap.

 2024 Volume Projections

When asked about secondary market volume projections, estimations were aligned with recent reports that landed on $140 billion (Jeffries, BlackRock) to $145 billion (PJT).

• Panelist 1: $130-$140 billion, skewed LP-led. 
• Panelist 2: $160 billion, 80%-90% of which is LP led, and expecting Q4 to be the biggest quarter yet.  
• Panelist 3: $140-$150 billion.

Overall, the sentiment was that the secondary market has demonstrated robust growth in the first half of 2024, and optimism for continued expansion remains high as we move forward.