Banner Ridge closes oversubscribed Fund V at $2.2bn hard cap
Capital called has exceeded distributions by more than $1tn since 2018
‘Like online dating’ – demand for secondary funds surges as stigma fades
January 5, 2024 (Preqin News) – GPs are seeking nearly $140bn in capital for secondaries funds entering what is forecasted to be a banner year for the increasingly popular asset class.
There are currently 168 private equity secondaries funds in market seeking to raise a total of $138.8bn, according to Preqin data. It highlights the significant demand for secondaries vehicles which, following a surge in fundraising in 2023, are expected to further benefit from increased transaction activity as LPs seek ways to generate liquidity from fund positions amid a difficult and slow exit market.
New York-based private equity firm Banner Ridge Partners announced Wednesday that it has raised $2.2bn at a final close of its fifth secondaries fund. Banner Ridge Secondary Fund V, which was launched in November 2022 with a $1.4bn target and held a first close in June 2023, was oversubscribed and closed at its hard cap. A co-investment fund to help investors manage concentration risk attracted a further $321mn.
‘Higher interest rates and a lack of liquidity in the market paired with greater acceptance of secondaries as a portfolio management tool are driving exceptional opportunities for us,’ said Tony Cusano, Co-Founder and Managing Partner at Banner Ridge. ‘Advisors are telling us that this will be a record year for secondaries. We have a huge pipeline right now and it’s growing.’
After seven years of positive capital flows for private equity LPs, net capital distributed turned negative in 2018, and has remained there ever since, according to Preqin data.
Capital called exceeded capital distributed by $858.7bn from 2018 to 2022, compared with a net inflow to LPs of $743.9bn over the preceding seven years. In the first six months of 2023, $581.4bn of capital was called, with just $277.1bn distributed. The lack of distributions makes it harder for LPs to commit to new funds.
Secondaries fundraising jumped last year to $70.7bn, more than double the $33.1bn raised in 2021, despite a decrease in the number of funds closing from 70 to 53. Mega funds from Blackstone ($22.2bn), Goldman Sachs ($14.2bn), Glendower Capital ($5.8bn), Pantheon ($3.3bn), and Adams Street Partners ($3.2bn) helped drive an increase in average fund size to $1.4bn, up from $542mn in 2022.
‘2023 saw a very high level of fund closes for secondaries,’ David Fowler, European Head of Fund Administration at Ogier Global, told Preqin News. ‘I would expect secondaries to remain popular as LPs look for ways to access a diversified portfolio and benefit from some of the discounts the large GPs can access, especially as funds look to provide liquidity to investors.’
There will be no shortage of opportunities for LPs to deploy to the strategy, with secondaries heavyweights Ardian ($25bn target), Lexington Capital Partners ($15bn and $4bn), HarbourVest Partners ($12bn), AlpInvest Partners ($10bn), Coller Capital ($10bn), ICG ($6bn), Hamilton Lane ($5bn), Partners Group ($5bn), and Clipway ($4bn) all currently in the market with funds open to investment.
Transaction activity is also expected to increase after a middling year as the gap in valuation expectations between buyers and sellers continues to narrow.
‘At the beginning of 2023, there was a wide bid-ask spread. Rate changes had caused a dislocation and buyers wanted discounts for anticipated defaults and multiple contractions, while sellers wanted to see it happen before they were willing to lower their pricing expectations. So, the transaction volume people were expecting going into 2023 didn’t happen,’ Cusano told Preqin News.
‘That spread has narrowed, partly because the default cycle hasn’t kicked in as hard or as quickly as expected, but more because sellers have eased their demands for the peak market pricing they had grown accustomed to in recent years.’
Where valuation gaps do remain, some buyers and sellers have used structures such as deferred payments and earn-outs to help get deals done.
‘There are still some valuation gaps, in particular for venture assets,’ David Swanson, a Managing Director at Kline Hill Partners focused on GP-led secondaries in North America, told Preqin News. ‘However, a need for liquidity helped to drive deals over the finish line. We did see both earn-outs and deferrals structured into transactions as a way to bridge the gap on pricing. The secondary market does need more capital - the lack of capital lengthened the time to bring syndicates together, particularly for GP-led deals.’
Meanwhile, the stigma once attached to secondaries deals has gone, with LPs and GPs both seeing the market as a useful mechanism to manage portfolios.
‘It’s kind of like online dating,’ said Cusano. ‘Fifteen years ago, you’d have been embarrassed to tell anyone you’d met your partner online. But now, it’s accepted and there’s nothing weird about meeting your partner on Bumble, or wherever. It’s like that with secondaries, the stigma is gone – GPs don’t care if an LP wants to sell, so long as it ends up in the right hands. And for LPs, it’s portfolio management: buying and selling private market positions as they would stocks or bonds.’
While GPs are likely to explore secondaries, continuation vehicles, and NAV loans to distribute capital back to LPs, increased volume from the LP side is also expected.
‘We think LP-led secondaries transactions will be a dynamic in private equity in 2024, with LPs exiting existing holdings to free up cash and make commitments to the new funds of top tier managers,’ Tim Toska, Global Head of Private Equity at Alter Domus, told Preqin News.
‘The maturation of the market has created a viable and efficient tool for investors to manage their exposure to older vintages, all the while upholding, if not augmenting, future fund commitments to private equity managers without being at the mercy of receiving distributions to fund future commitments.’
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.