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Secondaries: The race for liquidity in an uncertain market

By Jeslyn LAU, Ningzhe KOW


Over the past two decades, secondaries have grown significantly. Once a compartmentalized market dominated by distressed sellers, secondaries have since become an active marketplace with sophisticated sellers. With an overall market size of approximately US$60 billion in 2019, secondaries is one area to look out for in the private equity industry. As providers of liquidity to counterparties, Tim Huang, Partner at Lexington Partners, and Amit Gupta, Partner at NewQuest Capital Partners speaks to Katharina Poeter of Palico, to weigh in on the current trends and the future of the secondaries market in Asia and beyond.


A period of price discovery

“…there is danger in the marketplace, yet people have not seen it being reflected in the price.”

Expected discounts have not materialized in the secondaries market. From a purely valuation perspective, both Tim and Amit agree that private equity portfolios have not fully been marked-to-market, and that the impacts of COVID-19 have yet to be fully underwritten.


The differing expectations between buyers and sellers may have also contributed to the relatively narrow discounts. Asset managers looking to sell off their portfolios are expecting smaller discounts in anticipation of a recovery in the near future, while potential buyers are expecting large discounts, resulting in a valuation gap. To compound the issue, sellers have no desperate need to divest as stimulus packages and easing measures rolled out across the globe have provided sufficient liquidity.


It is often difficult for buyers and sellers to see eye-to-eye on prices, and this has resulted in significantly lower deal flow. Half a year into 2020, the secondaries market has not yet achieved a quarter of 2019’s total transaction volume.


Crunch time for GPs and LPs alike

“Nobody can time the market. You can sell a bit too early, you can sell a bit too late. The reality is, you should really check what your liquidity needs are.”

According to Tim Huang, LPs are likely to face a liquidity crunch in the coming quarters, attributed to increasing capital calls made by GPs. Amit further predicts that a sluggish capital market will also drive GPs to evaluate alternative exit strategies.


While the involvement of secondary funds can alleviate these problems, purchasing power remains limited. Amit believes that there is also a risk of crowding out, as sellers ‘queue up’ for the limited exit opportunities on the secondary market.

“People tend to focus on larger transactions and ignore the small ones.”

Amit believes that the secondaries market remains dominated by larger ticket sized deals. With more sellers coming to the market, the prices for secondaries transactions are likely to come down.


Playing the waiting game

“Should I just go sit for 6 months and then see what happens?”

Given the current challenges in the market, GPs may find it easier to wait for more stability in the markets before selling parts of their portfolio. Amit cautions against this stance, and advises that a wiser approach would be for GPs to start planning their exits ahead of time by having conversations with potential buyers early on. To ensure visibility in a market that is expected to become crowded and ‘messy’, GPs should be prepared to launch the sales process at a moment’s notice.


Amit further predicts that ‘windows of opportunity’ are fleeting, in part due to the limited number of secondary buyers, as well as external shocks to the market from developments in trade disputes. The ability to execute a deal the moment an opportunity arises can be critical for getting ahead of other deals in the pipeline.


The above conversation, titled ‘Private Equity Secondaries 2025: Where are we headed?’ is part of a series of webinars hosted by AIC Live. You can watch a recording of the conversation here: https://youtu.be/v19SzIFEHl0

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