the Secondary Market is still alive
The value of secondary deals led by private equity investors, or so-called limited partners, reached $56 billion last year — accounting for 52 percent of the total value of transactions, according to a recent report from Jefferies. The figure represents the first time since 2019 that PE investors represented a larger share of the secondary market than general partners (GPs). GPs do secondaries to transfer companies into new funds, which puts less pressure on pricing. About 50 percent of LPs were first-time sellers in the market — up from only 25 percent in 2021.
Portfolio managers are selling their stakes in private equity funds and driving down prices. However, investors can use the cash to invest in undervalued sectors. Jefferies reports that LPs have been selling their private equity stakes because their allocations to the asset class have grown too large relative to public markets. Since mid-2022, quarterly valuations of investors’ PE assets have fallen far less than their shrinking public portfolios. About 48 percent of LPs sold their PE assets because of overallocation concerns, according to Jefferies’ report.
In 2022, pension funds and sovereign wealth funds were the most active sellers in the private equity secondary market, accounting for 68 percent of deal value. Financial institutions and fund-of-funds followed with 16 percent and 9 percent, respectively. The rising number of LP sellers has led prices to decline in the secondary market. According to Jefferies, LPs were only able to sell their PE assets at an average of 81 percent of net asset value in 2022 — a sharp decline from 92 percent of net asset value a year before.
“Investors are more willing to take a discount today,” Cari Lodge, managing director and head of secondaries at Commonfund Capital, told II in an interview. That’s because private company valuations have come down from their 2021 peaks. Lodge explained that if investors sell their PE stakes with vintage years before 2022 and reinvest the money into newer funds, they have the potential to make more money. She added that for many PE investors, it’s more important to take advantage of the attractive pricing in the private market today than to avoid selling assets at a discount.
“Recessions are often some of the best returning vintage years,” said Mark Hoeing, president and head of private equity at Commonfund. He added that LPs may use the cash they get from selling PE stakes to invest in start-up companies.
“As there’s a lot of fear in the market…it is a very good time to start new businesses and invest in early-stage companies.”
About the Author
Mr. Koch — serial entrepreneur, wall street worker and late-stage investor specializing in secondary shares.
Previously: Twilio, Xiaomi, iQiyi, PinDuoDuo, Tilray, Livongo, Agora, Bandwidth, Kuaishou Technology, DataRobot, Robinhood, Chime, TransferWise, Oatly, Hims, Wise, Stripe, Kopi Kenangan, Toss, Coursera.
Currently: Enflame, Intercom, Horizon Robotics, FaDaDa, Wise, Epic Games, Hai Robotics, Automattic, Fiture, TigerG, and other
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