GP-led secondaries set to boost 2024 deal volumes

Dealmaking is due for a comeback this year with the return of financial sponsors and more demand for liquidity, according to a panel at IPEM Cannes.

IPEM - Taking the temp of deal markets
IPEM panellists agreed M&A is set to pick up in 2024 despite ongoing headwinds

Dealmaking in the overall private equity market will most certainly pick up in 2024, driven by customisable and flexible capital, according to panellists at IPEM Cannes on Wednesday.

Continuation funds, co-control and structured equity-type investments have been more common these days as GPs find a middle ground between debt and equity, according to Stephane Etroy, partner and head of European private equity at Ares Management.

“The key word this year is ‘flexible capital’. I don’t want to sell, but as a sponsor and owner, I need capital either to deleverage or for M&A or because I need DPI for my investors, or because I’m stuck with the asset and I still need to create equity value for my investors and I need capital and I don’t want to get a full dilution,” Etroy said.

“We’re going to see a lot more of these deals again throughout 2024. There are a number of elections. The geopolitical market is uncertain. It’s a great time for private equity because you can structure very good deals, but investors are definitely [pickier].”

Against a more volatile market backdrop, Mark McDonald, managing director and co-head of Brookfield Asset Management’s sponsor solutions business, noted that the co-investment, credit and buyout markets are “converging at certain intersections on certain transactions”.

“We are getting a lot of inbounds from GPs looking to do M&A, looking to take some DPI off the table, maybe a small recap to give DPI, but hold the asset another couple of years, or even do a continuation fund for a full exit. We are seeing that play a lot into the secondaries market.”

He noted, however, that the market is undercapitalised. “For every GP-led deal that is launched, only one of them gets through the market… which I think underwrites massive growth in the direct secondaries market over the next three to five years. You’re going to see an explosion of activity in GP-leds over the next years.”

Michael Elio, a partner at StepStone Group, agreed that the supply will only get bigger. “The GP continuation vehicle market in its current form began in covid, when GPs were all locked at home looking at their best assets and saying, ‘Let’s wrap this thing up and run with it.’ At the beginning they were all, ‘Great.’ That’s not the case anymore.”

LPs are looking at the GP continuation vehicle market like any other market now, and asset selection matters, according to Elio.

“There are three times as many continuation vehicles in the market as there is appetite for it. On the secondaries side alone, only half the deals in the secondaries market get done, which means there’s more to choose from and you can be selective,” he said.

“LPs are looking to the secondaries market as their liquidity solution on a go-forward basis. This market continues to grow, it continues to be the only area where transactions really are occurring in a meaningful way, and I think that will only continue to happen.”

GP-led activity reached about $52 billion last year, with “strong momentum gained in H2 2023… driven by record secondaries investor fundraising and new buy-side entrants”, according to Jefferies’ Global Secondary Market Review. That figure is expected to grow to more than $65 billion in 2024.