December 21, 2023

Liquidity management remains the key reason for LPs to sell, shows SecLink Poll

Liquidity Management remains the biggest driving factor for LPs to sell in the secondary market, according to 73% of respondents to SecondaryLink’s latest poll in an article published on their website on December 18, 2023.

You have to look back to a few industry data points to better understand why LPs may want to sell, as well as look at what may be anticipated in 2024. Following a record amount of distribution (from GPs to LPs) in 2021, this figure dropped off the cliff in 2022 and it continues in 2023,” said an industry executive who wished to remain anonymous.

What aggravates the lack of distributions is PE managers holding their ground in maintaining fair
market value and GPs not exiting legacy assets.

…(so) you can see why LPs are taking matters into their own hands in seeking for secondary sale of illiquid assets in the current environment. Unless the prospect of distributions improves in 2024, this phenomenon will continue to unfold,” he explained.

The need to sell is further aggravated by the net cash outflow seen by LPs in their private equity/credit portfolios over the past few years. “This issue of ‘net cash outflow’ is further compounded by lingering ‘denominator effect’ as traditional asset classes have yet to recover,” he added.

FlowStone Partners MD and President Scott Conners agrees with the reason. “In the current environment, sellers tend to be increasingly motivated by market and liquidity-driven factors that adversely impact their allocation levels,” he said.

Besides Liquidity Management, 16% of poll respondents said LPs will sell to Offload Tail-End Holdings, while 11% said they may sell to cut down on Non-Core Funds and Strategies.

Christoph Landolt, Investment Manager at Switzerland-based Multiplicity Partners, says the volume from LPs accessing the secondary market to sell tail-end positions will increase going forward.

We see an increase in volume from not only the sellers who wish to liquidate fund-of-funds and other liquidating vehicles but also from those that want to clean up tail-end portfolios. We expect many portfolio deals offered with meaningful discounts, something that is inherent to tail-end cleanups,” Landolt said.

H1 of 2023 saw $25 billion in LP volume, representing 58% of the total secondary market in the period. This trend of LP-leds constituting a higher market volume share is expected to continue.

On volume, Conners said, “The amount of private equity primary capital raised over five to eight years creates a baseline for secondary volume. Industry conventional wisdom is that 2%-3% of those commitments will become available for purchase on the secondary market, annually.”

Increased volatility and uncertainty in capital markets could motivate additional sellers to generate liquidity from their private equity partnership interests.”

However, LPs having to focus on secondary sales in this market will also have a wider impact. Their ability to consider new allocations, especially to new managers, will be limited, said the above-mentioned industry executive. “The impact of this is most pronounced in terms of their allocation to small middle market managers, particularly first-time funds.”



This document has been provided to you by Institutional Link Inc. (“SecondaryLink”) for information or discussion purposes only. It has been prepared without taking into account any party’s objectives, financial situation or needs. This document is not, and should not be construed as, marketing material for any investment opportunity, or an offer, solicitation or a recommendation to take any investment action, or participate in any investment strategy or sale of securities. This document should also not be construed as legal, tax or investment advice.

No representation, warranty or guarantee, express or implied, is made as to the accuracy, reasonableness or completeness of the information, observations, opinions, ratings and conclusions contained in this document. This document may contain opinions, estimates, prices, ratings and forward-looking statements which are subject to various risks, changes and uncertainties. Past performance does not guarantee future results or outcomes. SecondaryLink and their respective directors, employees or representatives expressly disclaim any responsibility or liability relating to any losses alleged to be the result of the use of or purported reliance upon this document, forward-looking statements, or any of the information contained herein. Any investment action with respect to any investment related opportunity that may be referred to herein should be made only after appropriate and independent due diligence.

The SecLink Report Data are subjective figures and are based on limited buyer, investor, user and agent feedback and therefore are not guaranteed or warranted to be accurate, complete, or timely, or to represent the current, past or future liquidity, value or price of a given asset. The actual past, present and future number of interested buyers and pricing for a fund or company may differ significantly from the SecLink Report Data. The SecLink Report Data can change at any time and SecondaryLink undertakes no obligation to update or revise them. Past performance (including of the SecLink Report Data) does not guarantee future results. You shall not use or rely on the SecLink Report Data or other information herein or within SecondaryLink or its content, news and research to make an investment decision such as when deciding to purchase or sell any security, make an investment, or to predict the future value or liquidity of any investment. Any and all decisions you make or refrain from making, as a result of your use of this report and the SecLink Report Data, including any related or associated reports, information, features, data or news, are made and shall be made solely at your own risk. SecondaryLink shall have no responsibility or liability arising from such decisions. Finally, the SecLink Report Data are not intended as a measure or indicator of the value or demand of any underlying portfolio holdings within a fund or the quality of a fund or a company.

Except with the prior written permission of SecondaryLink, you may not (a) transfer, sell, rent, distribute, display or otherwise disclose the information herein to anyone except as explicitly allowed herein; (b) use the information herein in furtherance of a product in competition to SecondaryLink; (c) present the information herein to potential investors, investors or your customers as part of any financial instrument, investment presentation, or investment product; (iv) use the information herein in the creation, structuring, or provision of any financial instrument or investment product; and v) use the information herein in calculations required for the creation, structuring, or provision of any financial instrument or investment product.

You hereby acknowledge that the information herein: (a) are and shall remain the property of SecondaryLink, (b) are protected under the patent, trademark, copyright, trade secret, confidential information and other intellectual property laws, and (c) were created, compiled, prepared, selected and arranged by SecondaryLink or its suppliers (as applicable) through the expenditure of substantial time, effort and resources and constitute valuable intellectual property of SecondaryLink or its suppliers (as applicable). Therefore, this document is confidential and may not be copied or distributed, in whole or in part, to any third party without the prior written consent of SecondaryLink.