Key LP Secondary Market Predictions for 2023

LP secondary market activity in 2021 generally mirrored the skyrocketing public markets, growing to over $130 billion in record-setting volume. This represents a 120% increase over 2020 and a 50% increase over the prior record year 2019. In stark contrast to 2021, a number of market shocks in 2022, including the war in Ukraine, high inflation and rising interest rates, contributed to intense volatility and Wall Street’s worst year since 2008.

Nevertheless, LP secondary volumes hit $57 billion in 1H 2022, and full-year volumes are still expected to be among the highest-ever levels achieved in this market once final numbers are tallied. A number of factors led to the secondary market’s resilience, including the consistent growth of GP-led transactions and LPs’ need to rebalance portfolios as public equities cratered.

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But what does 2023 hold for the LP secondary market? At Tap, we’ve relied on our proprietary market data and secondary fund partners to formulate our views of what to expect in 2023. Continue reading below for a summary of the five predictions we expect to make headlines this year.

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Secondary Transaction Volumes Will Exceed $130B, Breaking Prior Records

While 2022 transaction volumes may ultimately fall short of 2021’s record total, we expect 2023 to be the biggest year thus far for the secondaries market. Despite the market’s relative resilience last year, many LPs were still unwilling to sell as bid-ask spreads remained wide and the disconnect between private and public valuations persisted. 

However, LPs continue to face familiar pressures to meet fund liquidity and allocation requirements as many remain overallocated to private investments. Moreover, the exit market will continue to tighten and limit cash distributions to LPs. For reference, private equity LPs experienced roughly $340 billion in exits through 1H’2022 and remain materially offtrack to approximating 2021’s total of nearly $960 billion.

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As these pressures continue to mount and coincide with the stabilization of portfolio marks, we expect LPs to increasingly come off the sidelines, particularly once Q4’22 NAVs are released and bid-ask spreads subsequently shrink.

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GPs Will Increasingly Seek Out the Secondaries Market, With Mixed Success

Fund GPs will also feel the impact of LP liquidity needs, as over half of LPs self-report that they will access the secondary market in 2023 amid a weaker exit market for portfolio companies. Moreover, as the primary fundraising market has tightened, GPs will increasingly seek to deliver capital back to their investors through GP-led secondaries. This liquidity will support LP commitments in subsequent fundraises and also lift the profiles of GPs raising new funds by boosting distributed to paid-in capital (DPI).

However, as global economic uncertainty carries over from 2022, we expect the GP-led market to become increasingly competitive. Secondary investors will only deploy into the highest quality assets managed by the top GPs, targeting portfolios that are cycle-tested and profitable. Consequently, we expect a bit of a “feast or famine” market dynamic among GPs looking to launch secondary transactions in 2023.

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LP-Leds Will Comprise Over 50% of Fund Secondaries Volume

While GP-leds became a majority of the secondaries market in recent years, we expect 2023 (and perhaps 2022) to mark a return to LP-leds comprising over 50% of total deal volume. As mentioned, we predict that GP-led deals will face increased inter-GP competition but also competition from the LP-led segment of the market as additional supply appears amid narrowing bid-ask spreads. 

In lieu of signing up for GP-led deals, secondary investors will seek to take advantage of this LP-led supply coming online by strategically targeting a variety of LP-led transactions. Additionally, secondaries investors can expect favorable pricing among LP-led opportunities. We expect mounting overallocation pressures to result in 15%+ discounts as the price for liquidity alone.

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We also forecast a growing number of LP-to-LP deals as certain LPs combat overallocation issues while others remain underallocated to privates. For those LP interests that aren’t picked up by secondaries funds, other LPs may be the solution.

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Direct Secondaries Will Help Fill the Liquidity Gap

GP- and LP-led fund secondaries will help alleviate liquidity and portfolio construction pressures, but direct secondaries, where investors directly purchase privately-held companies, will be another important tool for returning capital to LPs. 

Public stocks cratered in 2022, contributing to broad-based pricing uncertainty across late-stage private companies and a number of high profile markdowns of unicorns (Instacart’s internal devaluation from $40 billion to $13 billion is a case in point). The direct secondaries market subsequently also froze up as bid-ask spreads widened and sellers far outnumbered buyers.

However, correcting valuations in 2023 should similarly boost direct secondaries volumes. Moreover, direct secondary investments have no or attractive fees compared to LP secondaries, providing an additional investment incentive. We expect that many LP secondaries funds will complement their LP holdings with direct secondary investments in their most attractive underlying fund assets.

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New Participants Will Continue to Enter the Secondaries Market

Secondaries investing is becoming increasingly popular among both existing and new institutional market participants, a trend we expect to continue strongly in 2023. For reference, in the first half of 2022, 48 percent of all secondary sellers were selling for the first time. On the buyside, investor surveys indicate that secondaries are now the second most popular long-term strategic preference of LPs after middle-market buyout. 

Driving this trend are family offices, foundations and endowments, which are increasingly purchasing on the secondary market to meet their privates exposure targets. Separately, high-net worth individuals, who will commit over $1 trillion to private equity funds by 2025, will form another important pillar of secondaries market participants.

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However, these new secondaries players face market access barriers as the traditional brokers are limited by their existing rolodexes and tend to target only the largest transactions and incumbent participants. As such, we believe digital transaction infrastructure will become increasingly important in expanding market access beyond the largest institutional LPs and secondaries GPs. Digital transaction tools, which streamline deal sourcing, diligence and execution will increasingly complement existing offline brokers and expand market access beyond broker coverage universes.

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Want to learn more about the Tap secondaries platform? Visit www.usetap.com or contact our team at team@usetap.com to gain access.

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