Davis Polk partner and Investment Management head Leor Landa was quoted from the fourth annual Buyouts secondaries roundtable discussing the secondaries market.

Discussing the appetite for GP-led transactions, Leor said, “There are lots of secular reasons for the popularity of GP-leds, each of which exists outside of a particular market moment. The first is the big shift in liquidity generally out of public markets and into private markets, and that is not changing. We have also seen this drop in M&A and IPO activity whereby secondaries are providing a great outlet for liquidity at a time when LPs are clamoring for distributions. That has drawn sponsors to the opportunities created by having secondary exits as an additional tool in the toolchest, using continuation vehicles as a fourth exit option. There are reasons why on certain deals it makes sense for a GP to maintain control for longer.”

Leor noted that GP-leds are also being used by mid-market managers to create distributions where successful deals have become oversized relative to assets under management. “There are lots of things running parallel that make these really attractive,” he said. “And the infrastructure has now been built out, and the best practice developed, to allow more and more LPs and GPs to get comfortable with these processes.”

Speaking about how early GP-led deals were a reaction to a moment in time when good assets caught up in the financial crisis had depreciated in value and LPs wanted liquidity, Leor said, “We thought we would get through a tough spot and then put the tool back in the toolbox, but we were completely wrong. The secondaries market has grown through the downcycle in M&A and IPOs, and through the upcycles in M&A and IPOs. It has proven to be a consistently growing market that is not context dependent.”

Leor added, “We’ve been saying for some time that credit secondaries would be the next big thing given the size of the private credit market. We are certainly seeing more take-up now and more focus on the buy-side with people willing to look at credit portfolios. We’re expecting more steady growth.”

Remarking on the rise in the number of 40 Act funds, Leor said, “This is a logical extension of what we have seen over the past decade in private equity, private credit and hedge funds, and it is starting to accelerate because some of the benefits of secondaries work well for that investor base. Secondary funds seek to mitigate the J-curve by being able to deploy capital faster, generating a higher velocity of returns and more visibility into liquidity and timing of distributions. Those strategies line up well with a more retail investor base, and we are expecting that market to continue to grow.”

The article noted that while the SEC’s proposed Private Fund Adviser Rules are dead, the policy concerns behind the proposals to regulate continuation fund deals remain. Leor added, “An important mitigant of those regulatory concerns is a properly intermediated market process for real price discovery with a sophisticated third-party adviser on board to help position the transaction.”

Looking forward to 2025, Leor believes secondaries will continue to represent a relative bright spot in the fundraising market as people are drawn to the attractions of the asset class.

“We expect fundraising generally in private markets to improve in 2025, and I think secondaries will outperform as people try to allocate more capital to it,” he added. “Even with a rebound in M&A activity and the return of IPOs, we still expect the volume in secondaries to increase meaningfully.”

“Secondaries roundtable sees boom continuing: ‘This is not a market moment’,” Buyouts (December 2, 2024)

Copy link to share post