LPs eye secondaries to meet liquidity, rebalancing needs - Coller

Roughly four in five respondents highlighted these two factors, while no other reason was cited by more than half. Liquidity and rebalancing were important to LPs when Coller last asked the question two-and-a-half years ago, but factors such as the need to refocus resources on top-performing GPs and the desire to lock in returns were frequently referenced.

“When you look at the delta between the different needs, it appears that LPs are saying this is the year for portfolio management,” said William Yea, a principal at Coller.

“It goes hand in hand with the liquidity aspect. In conditions where you were getting the level of liquidity you had been underwriting to, you could do some of the rebalancing more naturally with distributions from existing investments. Now that’s more of a challenge.”

The need for liquidity reflects a sluggish exit market and the way in which valuation resets in public markets are yet to be fully felt on the private side, leaving LPs overexposed to private equity on a relative basis. Some have been forced to rebalance through secondary sales, but many others are holding back – hence continued frustrations about an unbridgeable bid-ask spread in secondaries.

Yea noted that pricing isn’t the only sticking point; market conditions and uncertainty come into play as well. Coller sees plenty of managers exploring their options in terms of GP-led transactions, and Yea is encouraged by this even though exploration doesn’t necessarily lead to execution.

“Some of these discussions may not lead to deals getting done, but the fact conversations are happening is very positive. People are looking for the right solutions – and in some instances that might be continuing to hold assets and waiting for better exit markets,” he said.

Elsewhere, the survey offers a snapshot of LPs in defensive mode. When asked about their appetite for different asset classes, about 40% of investors said they planned to increase their target allocations to private debt and infrastructure over the next 12 months, compared to 27% for private equity.

Within private equity, four in five respondents expect to see good investment opportunities for portfolio GPs in lower and mid-market buyouts and special situations over the next two years. Only about half said the same of growth capital and one-quarter of large buyouts. In 2018, growth capital was the second most popular segment on 90% while large buyouts were favoured by 66%.

“The potential for scaling interesting mid-market platforms is interesting to many investors, and perhaps these strategies aren’t necessarily as impacted by the valuation squeeze from public markets and higher interest rates,” said Yea. “At the same time, mega buyout funds have become so large – globally and in Asia – that it’s not surprising people might not want to increase their allocations at this time.”

LPs are also noticeably more bullish on their outlook for North America and Europe than in Asia. Only 37% expect 2023 to be a stronger vintage for Asia while 45% look favourably on 2024. More than half of respondents are optimistic for 2023 in North America and Europe, rising to 71% for 2024. Yea observed that Asia-based LPs are much more positive about the prospects for their own region.

“When we look at these numbers it shows a directional view, but people often view regional private equity through the lens of what they are seeing at home. Asia Pacific LPs have a more positive view on Asian private equity as they are closer to the market,” he said. “Asia Pacific private equity is a broad and diverse asset class, aggregating a lot of different themes. There will be pockets of strong vintages.”

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• Topics
• Secondaries
• North America
• Europe
• Fundraising
• LPs
• Credit/Special Situations
• Asia
• Coller Capital
• Secondaries