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.”
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