With 2023 rapidly coming to a close, we wanted to share a few perspectives on the secondaries market this past year, along with some predictions for the year ahead.
While overall deal volume hasn't gone up as dramatically as in recent years – at Ropes & Gray, we've fielded 380+ distinct secondary transactions representing over $150 billion of transaction volume this past year – there has been much more diversity in terms of deal mix, with a fairly even mix of GP-led and portfolio sales volume.
At the same time, we've seen continued growth in preferred deals and other structured secondaries around the globe, but particularly in Europe. For GP-led deals, there's been a shift away from single asset deals back toward multi-asset (and even multi-fund deals).
From conversations with fund sponsors and investors alike, the consensus is that M&A volumes are anticipated to increase over the coming years and, in particular, in 2024. Not surprisingly, conviction is higher in Europe and North America than in Asia, given the protracted hibernation of the Chinese markets, in particular.
That said, many investors continue to express skepticism over GP valuations, finding them overly optimistic. The dearth of exit opportunities in the M&A markets has certainly driven GP-led volume up this year but, even if the M&A markets return to a healthier pace, GP-leds are here to stay as an attractive liquidity tool for both GPs and fund investors.
On the LP portfolio side of the industry, while many LPs have addressed imbalances in their portfolio as between public and private positions so the denominator effect is less prevalent in driving deal volume, there still have been a number of very large, multi-billion sales this year. Sellers are having to 'mozaic' their portfolios to multiple buyers (in many cases to six or more different buyers) to optimize pricing.
Given disparities in pricing for different fund interests, and the discounts buyers are applying to some funds, many sellers are putting larger portfolios out for bid than they ultimately anticipate selling as a way to optimize proceeds. We're also finding purchase price deferrals to be increasingly common. Further, the use of financing for these larger portfolio purchases has been increasing, notwithstanding the current rate environment.
Another point to note from this year is that the IRS's requirement that fund sponsors withhold on distributions to buyers of a fund interest if the fund sponsor determines that the buyer, who has the primary withholding responsibility, has not withheld a sufficient amount on the transfer went into effect on January 1, 2023 after having been suspended for several years. This threat of such backup withholding by a fund has left buyers less willing to be accommodating in their withholding analysis and we have seen withholding on many transactions with no U.S. nexus, as is required by the Treasury rules. It has also prompted funds to be more involved in the withholding analysis for transfers than they have been historically.
Fundraising has been strong for each of the historic secondaries buyers. Not only have many raised their largest ever flagship secondaries funds, but interest in more bespoke secondaries strategies, such as single-asset recaps only, or credit secondaries, has been growing. We've also seen a marked shift in how secondary buyers are approaching larger deals and we are seeing some buyers elect to raise coinvest capital to consummate a larger deal versus pairing with a co-lead as they might have done in the past, although co-lead deals remain common, particularly in larger deals.
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