Secondaries | Manulife Investment Management

Key takeaways

With trillions in private equity asset value sitting in closed-end funds and billions more added each year, LPs and GPs alike now need liquidity more than ever.
LPs who have been laboring under the denominator effect—and capital calls that exceed distributions—should benefit from shrinking secondary market bid-ask spreads in 2024.
In the GP-led market, the bifurcation between large-cap sponsors (on pause) and smaller players (still active) will continue, skewing deal counts higher and dollar volumes lower.

When the dust settles on the secondary market in 2023, volume is expected to nudge above $100 billion, the second- or third-largest annual amount ever; however, many market participants predicted more. While some are pondering the implications of this disappointment, history suggests pent-up volume not addressed in 2023 will flow into what could be an explosion of activity in 2024.

Whereas past dislocations saw faster LP price capitulation (sometimes spurred by distressed selling and other times for structural reasons), 2023 demonstrated a newfound discipline in LPs, as many waited for pricing to return to executable levels on their own terms. In 2024, market participants should benefit from tighter bid-ask spreads as the deal economy continues to heal and traditional secondary investors grow more eager to deploy dry powder.

Valuation momentum in the general partner (GP)-led market hit a wall in March 2022 as debt costs began to rise, resetting the math for all buyout deals. Most large-cap sponsors were effectively frozen into inactivity, unwilling to capitulate on pricing, while lower and mid-market sponsors had a greater need for exits. These dynamics caused a profound shift in the GP-led market as large-cap sponsors pulled back and smaller sponsors became the primary users of GP-led capital. A knock-on effect was downward pressure on valuations not seen since before the floodgates opened on this segment in 2019. More economic stability and some relaxing of interest rates should result in the next exit window allowing both larger and smaller sponsors to validate pricing and refocus on the fundamental driver of GP-led secondaries—the desire of sponsors to extend ownership on their highest-quality assets.

We believe the secondary market retains the dynamism that propelled it from a mere $2 billion in volume in 2002 to a peak exceeding $130 billion in 2021. This is partly supported by investor allocations to the category possibly reaching a new high. Further validation of this dynamism is the rise of a whole new market segment over the past decade, with GP-led secondaries growing to roughly half of overall transaction volume—an extraordinary growth rate for any new investment strategy. While macro factors will matter, we believe underlying forces driving activity in the secondary market are setting up a banner 2024 for all market participants.

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