In the last three years the volatility in the global Mergers and Acquisitions (M&A) market was especially pronounced, from the dizzy heights of 2021’s record deals, to a more muted picture this year. Due to the impact of the pandemic and other global macroeconomic events including rising interest rates and the Russia-Ukraine conflict, the outlook for M&A transactions remains uncertain.
Within these challenging market conditions, the secondary transactions market looks ripe for growth, in view of the uncertainty associated with the time horizon of liquidity profiles for primary private equity (PE) transactions. In the context of the private equity market, secondary funds, commonly referred as secondaries, acquire existing interests or assets from primary private equity funds before the end of the investment or commitment period.
Across Asia, general M&A transaction volumes were down in the first six months of the year but activity has picked up in the second half. While there is cautious optimism moving forward, there remains an air of restraint in the market, which translates into potentially positive news for the secondaries market in the region. Data from advisory firm Jefferies highlights how the global annual secondaries transaction volume jumped from $60 billion in 2020 to an eye-popping $132 billion in 2021. While 2022’s volume came in slightly lower at $108 billion, the secondaries market has continued to flourish and Jeffries are predicting estimated volumes of $100 billion for 2023. [1]
During the pandemic, it was incredibly difficult for primary investors to exit their investments due to depressed valuations, which in part led to the unprecedented growth in secondary transactions. Looking ahead, in the current uncertain macroeconomic climate, the secondaries market continues to provide an outlet for primary investors to liquidate their illiquid assets prior to the end of the committed investment period.
Growth of secondary transactions in Asia
The secondaries market in Asia started to emerge in the late 2000s following the global financial crisis. Asia’s prominence in this sphere has risen markedly over recent years as the private equity industry has developed.
According to Bain & Company, since its emergence, the secondary market in Asia has kept pace with its global counterparts, representing 5-10% of global volumes, which is comparable to the proportion Asia has contributed to global primary capital raised. With aggregate primary exit values declining sharply in Asia in 2022, secondaries represented 22% of the total private equity exit volume within the region, a sign of their growing importance as a channel for liquidity.[2]
Further, until relatively recently, the majority of secondary transactions in Asia were led by either US or European PE funds. More recently, in response to a combination of factors, such as market uncertainty, and evolving international relations , a growing number of PE funds are looking to operate independently. This has led to a need to review the reallocation of dollar funds and divestment of assets in Asia, which has contributed to the growth in the secondaries market in Asia.
In particular, a number of high value secondary deals were completed by RMB-denominated funds recently, which brings optimism to investors that there is real value in secondaries in the region. Global interest in China’s secondary market has been growing recently and foreign secondary firms have been looking to establish RMB denominated funds. Looking ahead, it is likely that we might see more examples of secondary transactions in the region. given the prospective opportunities for both investors and managers alike.
General Partner (GP) v Limited Partner (LP) exits
Prior to 2015, the majority of secondary exits were led by LPs; the LPs would usually be the party instigating the sale of the interest to a secondaries fund or another LP. However, we are now seeing a growing number of GPs leading secondary exits. GP-led transactions appeared in around 2012 as a small proportion of the overall secondaries market, accounting for approximately 7% of secondary transactions.[3] However, by 2020, triggered by the difficult exit conditions during the COVID-19 pandemic, GP-led transactions grew to around 58% of secondary transactions, overtaking LP secondaries volume for the first time.[4]
The growth of GP-led transactions has availed investors to diversified secondaries funds with a mix of LP and GP-led secondaries and there is optimism the secondaries market will continue to grow amidst growing demand for bespoke liquidity solutions in the secondaries market.
Looking ahead
The uncertain economic outlook and the evolution of the secondaries market represents numerous transaction opportunities for investors and advisors alike. Like in any other M&A transaction, Warranties & Indemnities (W&I) insurance provides a solution for parties looking to insure their risks inherent in secondary transactions.
Liberty GTS has extensive experience underwriting secondary transactions, and now has one of the largest M&A underwriting teams in Asia Pacific. The growth of the team has allowed us to expand our coverage across the region and help protect our customers from the complex risks they face in today’s evolving M&A market.
[1] Jefferies H1 2023 Global Secondary Market Review as reported in Pitchbook July 20, 2023: https://pitchbook.com/news/articles/secondaries-private-equity-valuations-mismatch-H1-2023
[2] Asia-Pacific Private Equity Report 2023 Bain & Company March 28, 2023, https://www.bain.com/insights/asia-pacific-private-equity-report-2023/
[3] The Evolution of Private Market Secondaries, Pitchbook
[4] Jefferies-Global_Secondary_Market_Review-January_2023.pdf
