Looking Back on 2023: The Summer Recovery That Wasn’t

There was a moment around midsummer when the slow activity that had confounded the secondaries market—indeed, much of the M&A landscape—for the previous year seemed to be passing. A flurry of new LP- and GP-led deal launches in July and August provided hope for a strong end of 2023. Protracted bid-ask spreads weren’t exactly going away, but the thinking was that buyers and sellers might have adjusted to the new reality and were maybe even embracing a new paradigm.

That didn’t quite happen. The final months of 2023 saw some activity, but a great deal of choppiness and no discernible momentum. High interest rates persisted, and there was no letup in economic disruption stemming from geopolitical turbulence—notably, the Israel-Hamas war that began in early October, which shook equity markets.

In one respect, the events since early 2022 have been an interesting experiment for a still relatively young secondaries market: While it bounced back quickly during other economic low points over the past couple of decades—e.g., the bursting of the dot-com bubble, the Global Financial Crisis, and the early days of COVID-19—that hasn’t happened this time around. Notably, the current combination of broader economic problems, high interest rates, and asset valuation uncertainty posed a new kind of challenge.

Despite the volatility, secondaries in 2023—accounting for LP- and GP-led deals—were about even with totals from 2022, even if the past year still fell below broader hopes. As 2024 kicks into gear, activity is still quite bifurcated. Pricing for high-quality, blue-chip assets is holding firm—and in some cases, rising. But “bifurcated” applies in multiple ways. There’s a spread on valuations on the same assets even when comparing competing buyers—as some are still holding onto bearish outlooks or hopes for discounts, while others are aggressive on a targeted basis with funds they know well. At the same time, a full pivot in which opportunistic sellers join motivated sellers has yet to occur.

Understanding Secondaries Market Pricing

Secondaries activity still has not recovered to 2021 levels, in large part due to fluctuations in asset valuations. The chart below shows a spectrum of how sellers’ actions correspond with average pricing, with the arrow representing the current state of the market. Each move to the right represents an increase of approximately 50 basis points.

Understanding Secondaries Market Pricing

Additionally, LP-leds’ share of total volume grew slightly in 2023 as compared with 2022, a sign that buyer appetites have been geared toward diversified portfolios available at discounts to NAV, as opposed to concentrated bets on assets often marketed with lofty price expectations.

In this report, we aim to provide clarity for what to expect in secondaries in 2024, including three reasons for optimism. We’ll also examine the GP-led space, specifically how fundraising strength continues and how buyers could be poised to strike when the timing and prices are right. We’ll also look at opportunities in underserved areas, some of which might not be so underserved anymore.

Three Reasons for Optimism in 2024

The final months of 2023 saw some good signs as far as M&A activity and IPOs—this typically happens before the unlocking of the secondaries market. Indeed, there is optimism that normalcy will return by mid-2024, especially given the Fed’s predicted rate cuts in December—even if the peaks of 2021 are hard to achieve.

But that kind of optimism—i.e., hopes that things will normalize in another six months—has been a common refrain for a while now. Given that, what factors make it more plausible in 2024?

Public Market Spillover (in a Good Way): Equity markets looked a lot better in late 2023 than they did a year ago, despite some fits and starts throughout the year. While that improvement has appeared to lessen the denominator effect for LPs, some LPs remain overallocated to private equity and they continue to increasingly look for liquidity directly from their portfolios to free up capital for other opportunities. Particularly, they may reduce exposure to select managers or clean up tail-end funds, especially amid distributions that are slow to trickle in. An increase in IPOs in 2024, even if it’s comparatively limited, could fuel sell-side activity at a moment when buyers, after focusing on fundraising, are ready to be more opportunistic.

Good Signs From an Improved Second Half: 2023’s overall secondaries activity was about even with what we saw in 2022. But considered through an optimistic lens, the second half of 2023 made up for a weak first half. If that momentum builds, even moderately, a bull market could be in the cards by mid-2024, especially given that GP-leds have been shedding weaker assets through write-downs, a sign of a healthy market. We’ll talk more about GP-leds in the next part of this report.

New Buyers Enter the Fray: 2023 saw a number of new buyers in secondaries, some of whom are underwriting portfolios using artificial intelligence. These entrants and their forward-looking strategies are signs of a healthy market—especially as deployment pressures continue to rise on sellers.

What to Watch for in GP-Leds and Why They Have Staying Power

Like the rest of the secondaries landscape, 2023 was challenging for GP-leds—but the news wasn’t all bad. Secondaries fundraising accelerated in the year’s second half, and a great deal of capital is ready to be deployed. Buyers also seem poised to lean into GP-led deals as prices on LP-leds rose, making it harder to win at auction.

Those buyers include new players—e.g., spinouts from direct private equity firms, family offices, and hedge funds. GPs also appear increasingly eager to sell as they look to provide liquidity to their LPs in advance of fundraising in a competitive market. After 2023’s muted traditional activity, LPs are looking for distributions before recommitting to a sponsor’s next fund.

In addition, there was some large-deal activity late in 2023 that could portend the market opening sooner than later. But a series of large deals that would clearly indicate a full recovery certainly didn’t happen—and it’s hard to gauge exactly when it will.

There are signs that will likely precede a recovery in GP-led market volume. First, a return to form for, and confidence in, equity markets; a more competitive LP-led market; and lastly, some GP-led success stories of deals moving quickly from launch to close.

Why do we expect LP-led activity to precede that of GP-leds? That’s the cadence we have seen in recent years as investors became more confident in the overall market and eventually less risk-averse. At that point, the single-asset continuation funds that now dominate GP-leds tend to become more appealing, and deals start happening.

Secondary Market Volume (2019-2023)

That said, we’re in somewhat uncharted territory when it comes to GP-leds, as the rise of single-asset continuation funds that transformed the space only happened recently. It was 2019 when deals involving that type of fund truly started to gain steam, attracting the notice of buyers and providing an appealing alternative to the LP-led auction process. Indeed, while LP-led deals surged during 2021’s M&A boom, GP-leds more than doubled their volume compared with 2020.

Still, it’s hard to predict the shape of the recovery in the GP-led space. But it’s our view that the strong activity earlier this decade was much more than a random blip without staying power. That’s especially true given the increased awareness of GP-led transactions—and a focus on them coming from many investment banks.

A Shifting Underserved Category

While choppiness continued across secondaries in 2023’s second half, there were important developments in underserved areas. Venture and energy really shouldn’t be considered underserved anymore. Meanwhile, funds of funds might be an area of opportunity, while emerging markets have become even trickier to navigate as a result of global turmoil. Here’s what to know about key underserved areas going in 2024:

Funds of Funds: This category is transitioning because of erratic fundraising activity. That means buyers have been less active and valuations are down. As a result, funds of funds appears to be a space in search of buyers—though there were some signs of buyers moving to fill the void at the end of 2023.

Emerging Markets: In a space essentially comprised by just a handful of countries—Brazil, China, India, and Russia—the fact that buyers have been burned in recent years has cooled activity. It’s our view that Western tensions with China and Russia will probably continue to hamper activity in those countries, as will broader instability in Brazil. India is probably the most attractive of the emerging markets because of its relative stability and visibility.

Venture and Energy: These are two areas that moved from underserved in 2023’s second half. Venture has had a big influx of new buyers who saw a vacuum of favorable pricing after a protracted period of fewer bids. As for energy, pricing has stabilized in recent months and some buyers are getting back into the fray, even though others might feel forever burnt, given the volatility in the category.