Recent IPOs and Secondary Fundraising
The recent IPO market slowdown has had a mixed impact on the secondary market for LP interests in private funds. While a few marquee companies, such as Instacart and Klaviyo were able to make their debuts, the vast majority of IPO candidates remain in the wings. There are currently no IPOs slated through the end of 2023.
On the one hand, the slowdown has made it more difficult for private equity funds to exit their investments through IPOs. This has led to an increase in the number of private equity funds that are considering secondary market transactions as a way to exit their investments.
On the other hand, while one might expect the IPO slowdown to make it more difficult for secondary market buyers to raise capital from institutional investors who are already over-allocated to privates, this hasn’t strictly been the case. For example, Goldman Sachs recently raised $15 billion for their secondaries funds, and Industry Ventures raised $1.7 billion.
Abundant supply of LP interests
There is currently a large pool of LP interests that are available for trading in the secondary market. For sellers this means that buyers can be discerning in which assets they choose to pursue. The amount of supply is due to a number of factors, including:
- The aging of the private equity industry: Many private equity funds are approaching the end of their investment periods, and investors are looking to exit their investments.
- The increasing popularity of private equity: Private equity has become an increasingly popular asset class for institutional investors. Particularly throughout 2020 and 2021 there was a massive influx into private investments. Naturally this has led to an increase in the volume of LP interests that are available for trading in the secondary market.
- The development of new secondary market products: Newer secondary market products, such as single-asset continuation funds and GP-led deals, are making it easier for allocators to offer private fund interests for sale.
Significant demand for liquidity
As previously noted, there is also a significant demand for liquidity from investors in the secondary market. This is due to a number of factors, including:
- The need to rebalance portfolios: Investors may need to rebalance their portfolios due to changes in their investment objectives, risk tolerance, or to balance public and private holdings.
- The need to meet redemption requests: Investors may need to meet redemption requests from their clients.
- The need to generate cash flow: Investors may need to generate cash flow to meet other financial obligations.
The result is that the secondary market for LP interests is becoming more competitive on both sides. This is due to the increasing number of buyers and sellers in the market, as well as the increasing availability of information about secondary market transactions. This increased competition is leading to lower transaction costs and more efficient pricing.
Decent economic environment
In Q3 the economic environment achieved a certain goldilocks zone, with inflation on a path to more acceptable levels and economic growth appearing reasonably strong. This has led to stability in public equities and enabled good price discovery in private markets, which in turn facilitates secondary transactions going into Q4. Putting it all together, conditions are currently favorable and there are good reasons to be a seller or a buyer of LP secondaries. However, It is not clear whether this favorable climate will persist in light of tightening domestic credit conditions to further reduce inflation, and difficult economic conditions and geopolitical turmoil abroad.
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