The private equity secondary market has matured and become more efficient over the last decade, with annual secondary transaction volume scaling from approximately $25 billion in 2012 to roughly $130 billion in 2021. Investors are increasingly turning to the secondary market for liquidity as they look to exit their private equity investments to better manage their overall portfolio allocations. Single asset transactions have been a more recent contributor to the growth of the secondary market, growing from 3% of total secondary transaction volume in 2018 to 25% in 2021, with a large part of this volume driven by the creation of continuation vehicles. These vehicles are quickly gaining in popularity, primarily by managers within the middle and upper end of the private equity market.

Continuation vehicles have become a hotly debated topic within the private equity community. The ability for private equity managers to recapitalize what is often their top portfolio company into a new single fund structure helps raise additional AUM and allows the manager to continue to own the company. However, it can be challenging for Limited Partners (LPs), who often lack the ability to underwrite a single company or are not given enough time to do so. Many institutional LPs are also simply unable to take the concentration risk of investing in a single asset.

As the secondary market evolves, single asset continuation vehicles are expected to become more common. LPs in private equity funds will need to evolve as well to take advantage of these opportunities and remain invested in the best assets over a longer period. This may require LPs to increase their allowable concentration limits, expand underwriting capabilities, or adjust policies in order to roll top investments into continuation funds.

Print PDF > The Evolving Secondary Market

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

A general partner (GP) stake is a direct investment in a general partner’s management company and is typically a passive, minority investment. GP stake investors have purchased interests in hedge fund, real estate, private credit, and venture capital managers, but the most significant adoption of this transaction type has been in the private equity buyout landscape. GP stake investing has increasingly become a topic of conversation due to robust fundraising by dedicated GP stake funds and the maturation of the buyout market, with many firms on the cusp of a generational transition and a desire to raise capital to finance future commitments and build out platforms via product proliferation and team growth.

Investors in GP stakes are attracted to the stable yield of the management fee, the upside potential provided by carried interest, and other strategic benefits that may include better access to co-investment opportunities or a primary allocation to future funds. Managers view a GP stake sale as a more favorable path to raising capital relative to an IPO given the scale required and the complexities of going public.
For limited partners (LPs) investing in funds of managers that have sold a GP stake, or are planning to do so, understanding the manager’s plans for the use of proceeds is critical. The capital is typically used to offer liquidity to existing owners of the management company and/or as a means to reinvest in the firm, either through increased GP commitments in future funds or growth initiatives. In addition to confirming the use of proceeds, LPs ought to diligence the rationale for the sale, percentage of the management company sold, and terms of the agreement between the manager and the GP stake investor.

GP stake sales were a key feature of the private equity marketplace in 2021 and show no signs of dissipating in 2022. While these types of investments historically have been limited to the largest buyout managers, increasingly middle market managers are selling GP interests. As we continue to see buyout funds participating in GP stake sales, as well as an increase in the number of dedicated GP stake funds raising capital, it is important for clients to consider this dynamic when investing in private equity funds.

Print PDF > What Is at Stake?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

U.S. venture capital deployment in 2021 smashed the previous record set in 2020, as $329.8 billion of funds were infused (+98% from 2020) into over 15,500 deals (+27% from 2020). While this tremendous volume of investment was deployed across the market, late-stage deals in particular raised over $100 million in capital in the last year. In fact, within the U.S. venture capital market, the substantial amount of late-stage venture deployment alone eclipsed the previous overall deployment record by 15%, as $190.8 billion of investments were deployed across 4,704 late-stage deals during 2021.

The growth trajectory of the late-stage venture capital market has been steadily climbing over the past decade as part of a broader evolution of the space, as private market companies have become larger and more durable due to capital availability, increased transparency, and minimal reporting requirements. That being said, the market may have now reached a size at which investors could begin to view early-stage venture capital and late-stage growth equity as distinct asset classes given the different investment considerations associated with each (e.g., duration, risk, returns, etc.) and separate the two within portfolios. Indeed, as late-stage deals become larger in size they become increasingly different investments, as many growth companies that have previously been supported by early-stage venture investors evolve into more established businesses with substantial revenues, proven product-market fits, much shorter duration (five years or fewer), lower loss potential, and valuations that are more aligned with public market peers.

As the venture capital market continues to expand due to new participants and existing investors increasing their allocations to the space, it is worth considering allocation mixes within portfolios with an eye toward having specific and dedicated early- and late-stage venture capital deployment targets.

Print PDF > 2021 Smashes VC Records as Late-Stage Deals Reshape the Market

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

A driving force for most investors seeking to add a private equity allocation to their portfolios is the strong performance that the asset class has consistently generated over time. Since 2009, the total number of global private equity investors has more than tripled, growing to nearly 10,000 global investors at the end of 2020.  The asset class has historically experienced a 5%-15% increase in the number of new investors on an annual basis, however the growth of new private equity investors has been 10%-15% in recent years. We believe these growth figures will remain elevated due to continued strong demand, which is largely driven by return targets, strong equity markets, and portfolios that have become larger and better able to accept illiquid private market allocations.

As more investors enter into the private equity space, it will likely become more difficult to access top performing managers due to fund size capacity constraints and the deeply established relationships that formed between early investors and these managers as they grew their platforms. Investors who are unable to gain exposure to the funds of established managers will need to seek out emerging managers for allocations.  While these emerging managers have historically provided a higher median return due to strong incentive alignments and smaller fund sizes, they have come with a much wider range of performance outcomes.  New and existing investors are likely to require guidance as difficult choices will need to be made when it comes to either constructing a new private equity program or refining an established program. To that point, difficult selections must be made as many managers are both returning to the market more quickly than they have in the past and raising larger funds with capital deployment outside their historical focus.

All of this being said, investors should not be deterred from exploring the value of an allocation to the private equity space given the benefits the asset class provides, including diversification and the potential for strong absolute returns. While the private equity investor universe is mostly comprised of larger, institutional investors like pension plans, endowments, and foundations, high-net-worth individuals and families have increasingly made allocations to private equity investments in recent years. We would encourage clients with sizeable asset levels, the ability to build diversified programs, and appropriate tolerances for the illiquidity associated with these types of investments to consider adding an allocation to private equity within their portfolios in a prudent and thoughtful manner.

Print PDF > The More the Merrier

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Despite strong fundraising numbers in recent years, private equity managers in the U.S. have stayed consistent with subsequent fund size step-ups. Through the first half of 2021, 72% of private equity managers launched funds with increased size targets, in line with the average over the last decade. The median fund size step-up in the first half of the year was 48%, modestly above the 40% average increase over the last decade, but in line with the industry average over the last five years.

Fund size is a critical factor for private equity investors to consider, as it can push a manager outside their strategy, require additional resources, require purchasing larger businesses that are more efficient, and/or take managers longer to deploy. That said, modest fund size growth is healthy for a private equity organization, allowing for internal growth, giving existing investors the ability to scale their allocations, and creating opportunities to bring new investors into the fund. Risks related to increased fund size can be mitigated by managers via scaled resources, targeting more portfolio companies, reducing the amount of co-investment offered, and/or reducing leverage — all things we look for in our due diligence process. We believe modest growth is healthy and to be encouraged if done responsibly, but we do carefully evaluate the magnitude of a fund size increase relative to our assessment of a manager’s capacity and strategy.

Print PDF > Private Equity Staying Rational with Fund Sizes

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.