The Takeaway: A Q&A With Sameer Shamsi on the GP-Led Secondary Market
What’s driving activity in the secondary market, and what solutions are GPs looking for the secondary market to provide?
These days, nearly every conversation we have with a GP includes some discussion around GP-led secondary solutions, particularly continuation funds. We’ve been pleasantly surprised that many GPs are coming to these conversations with some preexisting knowledge of continuation fund transactions, so each conversation tends to be less of an introduction and more of a practical discussion around specific assets and the art of the possible.
In the current market environment, a major diver of these discussions is mounting pressure faced by GPs to return capital to their LPs. Given the current M&A environment, continuation funds are emerging as a creative mechanism for GPs to address their LPs’ desire for liquidity while also giving the GPs an opportunity to hold on to high-quality assets for an extended period of time.
Some GPs come to us seeking a fundraising catalyst, and when this is an objective, we help them assess the feasibility of an LP tender transaction.
What is the environment for single-asset continuation fund transactions?
Continuation funds come in both single-asset and multi-asset flavors. Historically, single-asset continuation funds were rare as secondary investors emphasized diversification; however, single-asset continuation funds took off in popularity in 2020 and 2021, growing to represent roughly 50% of all continuation fund transactions. The growth of single-asset continuation funds has made continuation fund solutions more relevant for a broader set of GPs around a wide range of circumstances and is often where the majority of our discussions with GPs start.
While some secondary investors prefer to back multi-asset continuation funds, the market is quite receptive to single-asset continuation funds for trophy assets; after a quieter period, a number of $1+ billion transactions closed in 2023. It’s worth noting that the bar for single-asset continuation funds is typically high and secondary investors will closely scrutinize the transaction rationale, the health of the business, the GP’s go-forward projections, and the entry valuation and alignment with the GP before making a commitment. In addition to legacy secondary investors, new entrants with direct investing expertise are also raising capital to back single-asset continuation funds and a growing number of traditional LPs are opportunistically looking to participate in single-asset continuation funds. Ultimately, the facts and circumstances surrounding a GP’s portfolio and objectives will inform whether they should pursue a single-asset or multi-asset continuation fund.
Where’s the growth happening in secondaries?
We are seeing growing interest in and anticipation for credit secondaries. GPs focused on credit strategies have raised a substantial amount of capital in recent years, and as we like to say, today’s primary commitments lead to tomorrow’s secondary opportunities. Not only do we anticipate an increase in the supply of credit secondary opportunities over the near term, but we are also seeing traditional secondary investors raise dedicated capital to pursue credit secondaries and a variety of hedge funds and direct credit investors opportunistically target this sector.
How can Houlihan Lokey be helpful to GPs in the secondary market?
At Houlihan Lokey, we engage with GPs in a proactive portfolio review that helps identify assets that might be candidates for secondary transactions early. What differentiates Houlihan Lokey’s approach to executing secondary transactions is that we deliver an integrated solution to our clients that combines the deep domain expertise of our sector coverage bankers with our leading secondary market experience; simply put, we employ an M&A-style approach for continuation fund transactions. As the sophistication of the secondary market and its participants increases, we believe such asset-level knowledge will be increasingly critical to success. Additionally, Houlihan Lokey covers more than 2,000 LPs globally, and once transaction terms have been set, we leverage the full breadth of our relationships to build investor syndicates.
