Q: Are assets within General Partner-led (“GP-led”) secondary transactions quality assets?
— New York City financial advisor
A: Generally, yes, GP-led secondaries are quality assets relative to primary buyout private equity.
As a reminder, GP-led transactions are initiated by a GP aiming to distribute capital to limited partner (LP) investors, while maintaining ownership of a potentially top-performing asset(s). The GP sells the asset(s) to a continuation vehicle and at the point of the transaction and gives LPs the optionality to accept the liquidity or remain invested.
GP-led continuation funds have outperformed buyout strategies in each vintage year since 2018 (by 20% on average).
Net TVPI by Vintage Year (2018-2023)
The data is consistent with our observation that GPs often roll some of their best holdings into continuation vehicles in order to hold them longer and compound returns. Because the GP has owned the company before rolling it, it does not have the information asymmetry that often comes with a new buyout. However, like primary private equity, it’s important to remember that secondaries still contain investment risk.
GP-led continuation vehicles have become increasingly common due to a variety of reasons:
- Liquidity Management: Allow managers to better control the return of capital to their investors who need liquidity as opposed to prematurely selling to a strategic buyer or a competing private equity firm.
- Upside Participation: Can provide managers and investors the opportunity to partake in the next phase of growth of a high-quality asset.
- Extended Runway: Allow managers to refocus the direction of assets that need more time or more money to reach their underwritten thesis.
- LP Flexibility: Allow LPs choosing to exit to lock in their gains and get their capital back. For secondary investors, this transaction provides an opportunity to invest in a mature asset with growth potential.
When viewed from this perspective, one can appreciate that the resulting fund vehicle is often comprised of the top-performing, highest-conviction investments from the original fund (i.e., the ones that the GP believes have the most future value to be captured). In addition, in most GP-led transactions, GPs crystallize their carry in the new vehicle to ensure the further alignment of incentives with the new investor population.
As a result, these underlying companies tend to have better economics and have shown to perform equal to if not better than primary buyout funds.
