Which of the following describes your firm with respect to GP-led secondary transactions?
GP View 1
USD in Billions
Secondary Transaction Volume
Definitions and Disclosures
1Please be aware that the information herein is based upon results of a survey conducted by Hamilton Lane Advisors, L.L.C. (the “Firm”) of a number of private markets participants. The results of the survey may not necessarily represent the opinions of the Firm or its employees, officers or directors. Publication of this report does not indicate and endorsement by the Firm of the results included herein and should not be relied upon when making investment decisions.
Only 31% have completed a GP-led transaction and nearly every single one of them said they would do it again. Very few things in the investment world have that kind of unanimity. Almost three-quarters of the GP universe hasn’t done one and is surely seeing how lucrative these transactions can be. In a separate survey, general partners that completed a transaction reported very little negative LP feedback. We say that but urge some skepticism. How many LPs give negative feedback? Our experience is very few ever do. Of those that did, how many GPs actually heard it?
We’ll leave this discussion with a couple of observations:
GP-led transactions are probably the only part of the markets today where there is more deal flow than there is available capital. (The capital shortage! It’s real!) That always makes for an interesting dynamic.
The deals that are being done today are, as we noted, generally high quality. That will not always be the case. This market has yet to defy the laws of fear and greed.
LPs will need to weigh whether they want to take liquidity on fewer of these positions. It will have ramifications across a variety of portfolio construction choices, including concentration and duration.
GPs need to be aware of an unintended consequence of LP re-investment into these transactions. Will those LPs commit less to the GPs’ funds? There’s a terrifying thought on which to end this discussion.
LPs are overwhelmingly voting to take the liquidity option. The reasons may be varied, but two stand out. First, some LPs prefer to get their money back and not roll into a new investment with a far longer duration. Why? Most of these investments already have substantial gains, so the urge to take the liquidity option is a strong one. Second, a significant chunk of LPs has yet to develop internal processes for vetting GP-led transactions. In the absence of an established process, taking the liquidity option is the administratively simpler decision…and the one LPs are less likely to catch flak for making from stakeholders.
Do we think these types of transactions will continue? Don’t ask us; let’s see what the GPs think.
Well, say it ain’t so again: In almost 70% of the deals, general partners are rolling their entire carry into the continuation fund. That’s strong alignment. The reality is that what is happening today is that successful GPs are taking their best deals and reinvesting because they believe the future upside is strong. Given all this, we would expect LPs to have mixed views of whether to sell or re-invest. The data says the opposite.
Say it ain’t so: The deals that are being sold have higher multiples than the fund itself. These are some of the most successful deals in a fund, and these funds themselves are successful funds. (Say that line five times fast.) Our data indicates that, at the time the continuation vehicle closed, the fund net IRR only included one with a negative IRR, whereas the rest had IRRs ranging from mid-single digits to almost 80%. Okay, we know what you’re thinking now: GPs are taking their carry and running away, leaving buyers with all the risk.
Median Gross Multiples of Cost
LTM Continuation Vehicle Transactions
Keep in mind, this is a transaction type that largely wasn’t measurable prior to 2013. (GPs and brokers of that era were reluctant to call attention to GP-led processes, since they usually involved broken, “zombie” funds or other unloved assets.)
That mindset has undergone a drastic shift, and the quality of the assets often involved in these transactions has improved over time. GP-led secondaries in 2021 were, by volume, larger than the entire secondary market four years ago. Think of that: An entire sub-market is now bigger than an already large market was only four years ago. Where else has that happened?
It is important to note that, unlike in the early days of GP-led deals, few of these are now fund restructurings. Less than 20% of the deals we reviewed recently were of the entire fund, and 40% of deals in 2020 and 2021 were single-asset deals. We know what you’re thinking: "GPs are unloading their lousy deals on an unsuspecting buyer universe."
GP-Led Secondaries
We make a lot of predictions in these annual market overviews. Some of them even prove accurate. For years now, we have maintained that the secondary market is where the greatest changes are going to occur in the private markets. Well, we were right, and nothing has changed the landscape as much as GP-led secondaries.
Ok, what are these exactly and why should we care? A GP-led secondary is a transaction initiated by the GP that impacts all LPs in a fund. The most common form is a continuation fund, in which secondary buyers (including LPs that choose to re-invest) buy one or more assets from an existing fund. As for why you should care, it’s because this market has exploded.
Percentage of LPs Electing To Sell
Weighted by Volume
GP-led secondaries in 2021 were, by volume, larger than the entire secondary market four years ago.
Investment Activity
2022 Market Overview
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Performance
Where Are We Now?
Fundraising
Investment Activity
ESG
Liquidity
GP Carry Rolled into Continuation Vehicle
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Definitions and Disclosures
ESG >>
1Please be aware that the information herein is based upon results of a survey conducted by Hamilton Lane Advisors, L.L.C. (the “Firm”) of a number of private markets participants. The results of the survey may not necessarily represent the opinions of the Firm or its employees, officers or directors. Publication of this report does not indicate and endorsement by the Firm of the results included herein and should not be relied upon when making investment decisions.
USD in Billions
Secondary Transaction Volume
GP-led secondaries in 2021 were, by volume, larger than the entire secondary market four years ago.
Well, say it ain’t so again: In almost 70% of the deals, general partners are rolling their entire carry into the continuation fund. That’s strong alignment. The reality is that what is happening today is that successful GPs are taking their best deals and reinvesting because they believe the future upside is strong. Given all this, we would expect LPs to have mixed views of whether to sell or re-invest. The data says the opposite.
Percentage of LPs Electing To Sell
Weighted by Volume
Say it ain’t so: The deals that are being sold have higher multiples than the fund itself. These are some of the most successful deals in a fund, and these funds themselves are successful funds. (Say that line five times fast.) Our data indicates that, at the time the continuation vehicle closed, the fund net IRR only included one with a negative IRR, whereas the rest had IRRs ranging from mid-single digits to almost 80%. Okay, we know what you’re thinking now: GPs are taking their carry and running away, leaving buyers with all the risk.
Only 31% have completed a GP-led transaction and nearly every single one of them said they would do it again. Very few things in the investment world have that kind of unanimity. Almost three-quarters of the GP universe hasn’t done one and is surely seeing how lucrative these transactions can be. In a separate survey, general partners that completed a transaction reported very little negative LP feedback. We say that but urge some skepticism. How many LPs give negative feedback? Our experience is very few ever do. Of those that did, how many GPs actually heard it?
We’ll leave this discussion with a couple of observations:
GP-led transactions are probably the only part of the markets today where there is more deal flow than there is available capital. (The capital shortage! It’s real!) That always makes for an interesting dynamic.
The deals that are being done today are, as we noted, generally high quality. That will not always be the case. This market has yet to defy the laws of fear and greed.
LPs will need to weigh whether they want to take liquidity on fewer of these positions. It will have ramifications across a variety of portfolio construction choices, including concentration and duration.
GPs need to be aware of an unintended consequence of LP re-investment into these transactions. Will those LPs commit less to the GPs’ funds? There’s a terrifying thought on which to end this discussion.
Median Gross Multiples of Cost
LTM Continuation Vehicle Transactions
Keep in mind, this is a transaction type that largely wasn’t measurable prior to 2013. (GPs and brokers of that era were reluctant to call attention to GP-led processes, since they usually involved broken, “zombie” funds or other unloved assets.)
That mindset has undergone a drastic shift, and the quality of the assets often involved in these transactions has improved over time. GP-led secondaries in 2021 were, by volume, larger than the entire secondary market four years ago. Think of that: An entire sub-market is now bigger than an already large market was only four years ago. Where else has that happened?
It is important to note that, unlike in the early days of GP-led deals, few of these are now fund restructurings. Less than 20% of the deals we reviewed recently were of the entire fund, and 40% of deals in 2020 and 2021 were single-asset deals. We know what you’re thinking: "GPs are unloading their lousy deals on an unsuspecting buyer universe."
GP-Led Secondaries
We make a lot of predictions in these annual market overviews. Some of them even prove accurate. For years now, we have maintained that the secondary market is where the greatest changes are going to occur in the private markets. Well, we were right, and nothing has changed the landscape as much as GP-led secondaries.
Ok, what are these exactly and why should we care? A GP-led secondary is a transaction initiated by the GP that impacts all LPs in a fund. The most common form is a continuation fund, in which secondary buyers (including LPs that choose to re-invest) buy one or more assets from an existing fund. As for why you should care, it’s because this market has exploded.
GP Carry Rolled into Continuation Vehicle
LPs are overwhelmingly voting to take the liquidity option. The reasons may be varied, but two stand out. First, some LPs prefer to get their money back and not roll into a new investment with a far longer duration. Why? Most of these investments already have substantial gains, so the urge to take the liquidity option is a strong one. Second, a significant chunk of LPs has yet to develop internal processes for vetting GP-led transactions. In the absence of an established process, taking the liquidity option is the administratively simpler decision…and the one LPs are less likely to catch flak for making from stakeholders.
Do we think these types of transactions will continue? Don’t ask us; let’s see what the GPs think.
Which of the following describes your firm with respect to GP-led secondary transactions?
GP View 1