Secondary growth: Navigating the trends

Increased transaction volumes for GP-led deals in recent years have buoyed the secondary market to new heights, with today’s GP-led space featuring some of the highest quality assets managed by some of the best-performing GPs within their areas of focus. The rise of GP-led deals has been accompanied by increasing transaction sizes, with more than 25 GP-led deals valued at $1 billion or more completed in 2021.⁵ The rapid growth of the market and increasing deal sizes have led to more opportunities for investors, but at the same time there is a growing shortage of capital with a mandate to invest these transactions.

Overall, there is far more supply of GP-led opportunities today than available capital to invest - particularly given the desire by many secondary managers to maintain high levels of diversification within a typical secondary fund strategy. This dynamic has led some managers to form dedicated pools of capital focused on GP-led deals or other types of continuation solutions - taking advantage of this attractive market opportunity by investing in calibrated assets with a compelling risk/return profile.

For experienced secondary players with capital to deploy, it's a buyer’s market with abundant supply. But not all deals are created equal, and GP-led transactions are far from simple or straightforward. For example, sourcing and structuring a new transaction requires deep expertise and relationships to manage a process that may take six to nine months to complete. Due diligence for GP-led deals is also often labor and resource intensive and requires a distinct skill set to, among other things, ensure that all parties’ interests are properly aligned on areas such as pricing and valuation, timing, vehicle structure, and economic terms.

Part 2 of this series will explore the secondary ecosystem in greater granularity, outlining important tools and considerations LPs have at their disposal for optimizing these transactions and mitigating some of the risks that these transactions can present when interests are not properly aligned.

Inside a GP-led deal

The transaction

  • A top-quartile manager looking to wind down several older vintage funds while accelerating liquidity for existing LPs in several newer vintage funds.
  • Another key objective for the GP was raising incremental follow-on capital to help accelerate growth opportunities within the portfolio.
  • As a result, the GP decided to pursue a multi-fund GP-led transaction to meet its goals.

The opportunity

  • Chance to acquire high-quality assets at an attractive valuation.
  • Highly attractive portfolio comprised of market-leading companies exhibiting attractive growth and cash flow characteristics.

The challenge

  • Significant level of due diligence involved given size and scope of portfolio in addition to meaningful structural and legal complexity.
  • Crafting a solution that re-incentivized the GP to ensure their financial objectives were aligned with the new secondary investors and LPs opting to maintain exposure.

The solution

  • Negotiations between stakeholders culminated in a $1.7 billion transaction involving over 20 companies across multiple funds being transferred into a newly formed continuation fund.
  • Existing LPs were provided the option to either receive liquidity or to reinvest proceeds into the continuation fund, with ~20% choosing the reinvestment option.
  • The GP invested over $100 million into the transaction at the same price as secondary buyers, ensuring strong alignment.
  • A new carried interest incentive plan was put in place to tie the GP’s future economics to performance for the new secondary investors.

The deal summary, general partner, and/or companies above are intended for illustrative purposes only. While this is an actual investment or relationship in a portfolio, there is no guarantee it will be in a future portfolio.

Outlook

The GP-led deal market is growing rapidly, providing fertile ground for GPs, portfolio companies, existing LPs, and secondary investors to realize the meaningful benefits they can offer. As market conditions continue to shift, GP-led deals are adding flexibility and optionality for GPs and LPs, along with an expanded, high-quality opportunity set for secondary investors.

We believe that the secondary market has evolved to become a strategically valuable liquidity source and portfolio management tool for both LPs and GPs. As a result, it also presents an attractive opportunity for experienced, sophisticated buyers to deploy capital in innovative ways, especially during periods of elevated volatility and ongoing uncertainty.

5 Evercore: Secondary Market Survey Results, January 2022.