Private equity secondaries investors are hunting for top-quality single-asset continuation vehicles as the dry powder available for dealmaking continues its push further into record territory.

Global secondaries dry powder more than doubled in under four years to reach an unprecedented $201.4 billion as of March, the most recent estimate available from Preqin.

Among the top targets for that capital are single-asset continuation vehicles, as general partners (GPs) facing a dearth of exit opportunities for primary fund investments turn to the secondary market to create liquidity for limited partners while extending the value-creation runway for portfolio companies.

"The slowdown in the M&A markets and the fact that there's not those other exit alternatives that a sponsor might have for their assets influence the attractiveness of [the secondary market]," said Isabel Dische, a partner with Ropes & Gray and chair of the law firm's alternative asset opportunities group.

Secondaries investors paid top dollar for the portfolio companies GPs placed in continuation vehicles earlier in the year. GP-led single-asset transactions were the least-discounted deals on the secondaries market in the first half, with 58% pricing at or above net asset value compared with just 12% of GP-led multi-asset offerings and 5% of limited partner portfolios, according to a survey of investors conducted by Lazard Ltd.

Record dry powder

The GP-led deals coming to the secondaries market are being met by a growing stockpile of investable capital.

2023 is on track to see at least the second-largest private equity secondaries fundraising haul in a decade, with $67.86 billion raised through Dec. 4, according to Preqin. At nearly $2 billion, the average secondaries fund size in 2023 as of Dec. 4 was larger than the $1.9 billion average in 2020, when secondaries funds pulled in a record $78.29 billion.

Blackstone Inc. played a role in pushing that average fund size higher in 2023 when it announced the final close for Strategic Partners Fund IX, the largest-ever private equity secondaries fund, at $22.2 billion in January. At the same time, it announced a $2.7 billion close for Strategic Partners GP Solutions LP, its first-ever fund specifically targeting GP-led offerings on the secondaries market.

Supply and demand

Even with the record amount of capital available for deals, transaction volumes in the secondaries market declined 24% year over year in the first half to $40 billion, Campbell Lutyens estimated in a September report. Primary private equity fund deals, by comparison, fell more than 50% year over year in the first half.

– Read the latest on global private equity entry activity.  – Catch up on the third-quarter performance of private equity's Big Four firms.  – Learn more about regulatory scrutiny of private equity add-on deals.

Gerald Cooper, Campbell Lutyens' head of North American secondaries, told Market Intelligence the secondaries market was experiencing the same buyer-seller disconnect that has slowed M&A broadly since public sector valuations fell in 2022. Despite the record levels of dry powder, supply still exceeds demand in the expanding secondaries marketplace, Cooper added.

"We're seeing buyers take a binary approach and evaluating which transactions they want to be a part of," he said.

Outlook

Even with strong pricing for GP-led single-asset transactions in the first half, the deals accounted for a smaller portion of overall secondaries activity compared with 2022, according to the Campbell Lutyens report.

Ropes & Gray's Dische said some secondaries investors may have filled up on GP-led opportunities in 2022 and were more focused on limited partner offerings in 2023 to ensure balance in their secondaries portfolios. But there is no single story when it comes to GP-led continuation vehicles, she added, noting that investors newer to the secondaries market continue to show strong appetite for the deals.

As dry powder continues to swell and an improving macroeconomic picture narrows the bid-ask spread, demand is expected to pick up. Dische predicted a steady supply of GP-led offerings to meet that demand.

"The growth in GP interest in these transactions continues to expand and that has continued unabated, particularly given the relative slowdown in the M&A markets," Dische said.