Over the last 12 to 18 months, we have witnessed a meaningful decline in private equity (PE) exits, which triggered an estimated $106 billion of net cash outflows for PE investors in 2022 alone.1 In our view, this dynamic—combined with the denominator effect and generally elongating holding periods—is opening attractive opportunities for providers of liquidity to the private markets.
We believe GP-orchestrated “continuation funds” can help ameliorate this liquidity challenge and also offer a compelling way for investors to gain exposure to private markets at a potentially attractive point in the cycle and in a targeted, highly selective manner.
In this paper—the latest installment in our ongoing secondaries series—we discuss potentially favorable trends for GP-led investors in the current environment, including:
- Demand for liquidity across the PE industry: The pressure remains high on both LPs and GPs to generate liquidity from PE holdings as investors remain overallocated and aggregate capital calls outstrip aggregate capital distributions.
- Desirable liquidity optionality from GP-led transactions: GP-led transactions can help GPs offer needed liquidity for their LPs in the current environment. GPs also get extra time and capital to continue expanding some of their most successful portfolio companies rather than selling them to other PE sponsors.
- Attractive supply-demand imbalance for investors in GP-led transactions: We believe the competitive dynamics in the secondary market remain attractive as the volume of marketed secondary opportunities was at an all-time high in 2022,2 even as the market experienced an ongoing undercapitalization, especially for GP-led transactions.
- High barriers to entry in the GP-led market: We believe success in the GP-led market requires a unique combination of skillsets. Investors must combine direct underwriting and transaction structuring capabilities with the ability to work with GPs as a limited partner.
- Risk mitigation by targeting quality assets: We believe that targeting quality assets can reduce risk by avoiding much of the underlying return dispersion that often comes with buying large, diversified portfolios which were invested in the boom years leading up to 2022.
- Buyout returns with potentially lower risk: We believe GP-led transactions can generate buyout returns at a superior risk profile due to structural differences versus new buyout investments, including strong alignment with the underlying GPs, lower execution risk, shorter duration, lower entry valuations and safer capital structures.
