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 Strategy insights​

GP-led Secondaries: A Dynamic Market with Increasing Liquidity Benefits

March 29, 2023 | 12 min read

Over the past year, climbing inflation, rising interest rates, the Russia-Ukraine conflict, and ongoing supply chain issues have contributed to significant uncertainty for financial markets. In the near term, we believe the ongoing disruption can serve as a catalyst for increased selling activity and more attractive pricing and terms for secondary buyers. For secondary investors in GP-led transactions, the market dynamic is creating a greater supply of high-quality, lower-risk profile opportunities supported by the continuity of the existing sponsor.

Despite the more turbulent landscape, GP-led deals continue to represent a significant source of future growth in the secondary market, providing:

  • GPs with the ability to extend their ownership of trophy assets and greater flexibility to manage their portfolios
  • Portfolio companies with more time, and potentially capital, to maximize their value creation potential
  • LPs with more liquidity options and flexibility to manage private markets allocations, and
  • New investors with access to high-quality companies managed by established sponsors, with the potential for meaningful upside, that wouldn’t ordinarily trade on the secondary market

This report charts the evolution of GP-led deals and explains why we believe they present an attractive investment opportunity. It also outlines the distinct role that these transactions can play in investors’ portfolios as more volatile market conditions drive the need to optimize portfolio construction, both in terms of alpha generation and risk management.

Understanding today's GP-led deals

GP-led transactions are distinct from more traditional secondary deals in which LPs sell their existing interest in one or more partnerships, often involving multiple underlying managers and companies. In contrast, GP-led transactions are initiated by the manager of a private equity fund, often to restructure one or more of their funds and provide liquidity to existing LPs. Some market participants may have historically viewed GP-led transactions as a way for underperforming managers to extend the life of their franchise, which we believe is a view rooted in the early days of the GP-led market from a decade ago. Since then, these deals have evolved substantially and are now broadly embraced by high-quality GPs as a flexible means to hold on to key strategic assets that are often top performers – giving them further runway and capital to generate additional value.

These transactions also provide GPs the ability to offer existing LPs the option to either lock in performance associated with legacy assets and receive liquidity, or to retain their existing exposure, often by reinvesting in a newly formed vehicle created as part of the transaction. Practically speaking, GP-led transactions have evolved to offer all parties a viable solution for navigating current market challenges, while also directly addressing the liquidity needs of existing LPs.

While much has changed over the past year, we believe the secondary market remains vibrant and poised for further growth. 2022 was the second busiest year on record in the secondary market, with $103 billion of transactions closing and the market experiencing a compound annual growth rate (CAGR) of 17% between 2013 and 2022.1 Over the same period, the GP-led segment grew from just $5 billion of volume in 2013 to $48 billion in 2022.2 Once a small subset of the overall secondary market, GP-led deals have soared to account for approximately half of all secondary deal volume since 2020.3

Secondary market growth
Secondary-Market-Deal-Bars.svg

Source: Preqin, primary capital raised as of 12/31/2022 and Evercore: Secondary Market Survey, February 2023.

Key Growth Drivers

Growth of private markets – $3.6 trillion in primary capital raised over the past 5 years

Increased churn rate of LP interests

Acceleration of GP-led transactions

While the bespoke nature of GP-led transactions has produced a variety of structures, the vast majority involve creating a new vehicle, called a continuation fund, that purchases one or more select companies from the GP’s existing fund(s). The continuation fund is managed by the same GP and backed by new secondary investors plus any LPs that wish to retain exposure to the asset(s). The new vehicle typically resets the fund term and includes a new incentive structure for the sponsor in order to maximize alignment between the sponsor and investors in the continuation fund. GP-led deals can vary markedly in concentration – from consisting of a single company to dozens of companies. While GP-led transactions have broadly made up close to 50% of annual secondary transaction volume since 2020, single asset deals accounted for 42% of the total GP-led activity in 2022 – giving both GPs and LPs valuable flexibility to actively manage portfolios or meet rising liquidity needs.4 
Proportion of GP-led asset deals involving a single asset
Secondary-Market-Deal-pies-02.svg

Source: Evercore: Secondary Market Survey Results, February 2023.

GP-led deals and a trifecta of benefits

A unique confluence of stakeholder benefits and needs is driving the increasing adoption of GP-led deals and the innovative structures through which they are being completed. As volatility has risen across markets, GPs are increasingly facing challenges and constraints associated with the customary 10-year fund life model in the private equity industry. Many GPs wish to retain exposure to their most attractive portfolio companies to maximize value while also meeting the liquidity requirements of their LP base.

LPs too face increasingly volatile global market conditions and a rising need for liquidity, or in some instances, a need to reduce oversized allocations to private market investments. GP-led deals offer LPs a timely solution to help navigate these challenges – with investors increasingly utilizing the accelerated distributions associated with GP-led deals to meet liquidity needs or to adjust allocations in response to market conditions. In 2022, 78% of LPs opted to receive liquidity in GP-led asset deals.5

Below is an overview of some of the key benefits and features for each of the parties in a GP-led transaction.

Benefits snapshot: A win-win-win

Ability to access high quality, top performing assets

GPs

Existing LPs

New LPs/Investors

Strong alignments of stakeholder interest

GPs

Existing LPs

New LPs/Investors

Accelerated Liquidity

GPs

Existing LPs

New LPs/Investors

Increased optionality/portfolio flexibility

GPs

Existing LPs

New LPs/Investors

Access to unique market exposures

GPs

Existing LPs

New LPs/Investors

Ability to conduct deeper dule diligence given continuity of GP

GPs

Existing LPs

New LPs/Investors

GPs
Existing LPs
New LPs /Investors

Ability to access high-quality, top performing assets

Strong alignment of stakeholder interests

Accelerated liquidity

Increased optionality/portfolio flexibility

Access to unique market exposures

Ability to conduct deeper due diligence given continuity of GP

Source: HarbourVest

Secondary growth: Navigating the trends

Increased transaction volumes for GP-led deals in recent years have buoyed the secondary market to new heights, with today’s GP-led space featuring some of the highest quality assets managed by some of the best-performing GPs within their areas of focus. The rapid growth of the market has led to more opportunities for investors, but at the same time there is a growing shortage of capital with a mandate to invest these transactions.

Overall, there is far more supply of GP-led opportunities today than available capital to invest – particularly given the desire by many secondary managers to maintain high levels of diversification within a typical secondary fund strategy. This dynamic has led some managers to form dedicated pools of capital focused on GP-led deals or other types of continuation solutions – taking advantage of this attractive market opportunity by investing in calibrated assets with a compelling risk/return profile.

For experienced secondary players with capital to deploy, it’s a buyer’s market with abundant supply. But not all deals are created equal, and GP-led transactions are far from simple or straightforward. For example, sourcing and structuring a new transaction requires deep expertise and relationships to manage a process that may take six to nine months to complete. Due diligence for GP-led deals is also often labor and resource intensive and requires a distinct skill set to, among other things, ensure that all parties’ interests are properly aligned on areas such as pricing and valuation, timing, vehicle structure, and economic terms.

Inside a GP-led deal

The deal summary, general partner, and/or companies above are intended for illustrative purposes only. While this is an actual investment or relationship in a portfolio, there is no guarantee it will be in a future portfolio.

Outlook

The GP-led deal market is poised to continue its rapid growth, providing fertile ground for GPs, portfolio companies, existing LPs, and secondary investors to realize the meaningful benefits they can offer. As market conditions continue to shift, GP-led deals are adding flexibility and optionality for GPs and LPs, along with an expanded, high-quality opportunity set for secondary investors.

We believe that the secondary market has evolved to become a strategically valuable liquidity source and portfolio management tool for both LPs and GPs. As a result, it also presents an attractive opportunity for experienced, sophisticated buyers to deploy capital in innovative ways, especially during periods of elevated volatility and ongoing uncertainty.

Would you like to discuss the expanding opportunities for the GP-led market?

Contact us

1. Evercore: Secondary Market Survey Results, February 2023. 
2. Evercore: Secondary Market Survey Results, February 2023. 
3. Evercore: Secondary Market Survey Results, February 2023. 
4. Evercore: Secondary Market Survey Results, February 2023.
5. Evercore: Secondary Market Survey Results, February 2023.

Diversification does not ensure a profit or protect against a loss.
 
This material is solely for informational purposes and should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
 
HarbourVest is an independent, global private markets firm with 40 years of experience and more than $106 billion in assets under management as of December 31, 2022. Our interwoven platform provides clients access to global primary funds, secondary transactions, direct co-investments, real assets and infrastructure, and private credit.

More HarbourVest Insights

Professional Investor Definition

“Professional Investor” under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) and its subsidiary legislation) means:

(a) any recognised exchange company, recognised clearing house, recognised exchange controller or recognised investor compensation company, or any person authorised to provide automated trading services under section 95(2) of the SFO;

(b) any intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong;

(c) any authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(d) any insurer authorized under the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong), or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong;

(e) any scheme which-

(i) is a collective investment scheme authorised under section 104 of the SFO; or

(ii) is similarly constituted under the law of any place outside Hong Kong and, if it is regulated under the law of such place, is permitted to be operated under the law of such place,

or any person by whom any such scheme is operated;

(f) any registered scheme as defined in section 2(1) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong), or its constituent fund as defined in section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A of the Laws of Hong Kong), or any person who, in relation to any such registered scheme, is an approved trustee or service provider as defined in section 2(1) of that Ordinance or who is an investment manager of any such registered scheme or constituent fund;

(g) any scheme which-

(i) is a registered scheme as defined in section 2(1) of the Occupational Retirement Schemes Ordinance (Cap. 426 of the Laws of Hong Kong); or

(ii) is an offshore scheme as defined in section 2(1) of that Ordinance and, if it is regulated under the law of the place in which it is domiciled, is permitted to be operated under the law of such place,

or any person who, in relation to any such scheme, is an administrator as defined in section 2(1) of that Ordinance;

(h) any government (other than a municipal government authority), any institution which performs the functions of a central bank, or any multilateral agency;

(i) except for the purposes of Schedule 5 to the SFO, any corporation which is-

(i) a wholly owned subsidiary of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;

(ii) a holding company which holds all the issued share capital of-

(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or

(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong; or

(iii) any other wholly owned subsidiary of a holding company referred to in subparagraph (ii); or

(j) any person of a class which is prescribed by rules made under section 397 of the SFO for the purposes of this paragraph as within the meaning of this definition for the purposes of the provisions of the SFO, or to the extent that it is prescribed by rules so made as within the meaning of this definition for the purposes of any provision of the SFO.

The first of such classes of additional “professional investor”, under the Securities and Futures (Professional Investor) Rules (Cap. 571D of the Laws of Hong Kong), are:

(k) any trust corporation (registered under Part VIII of the Trustee Ordinance (Cap. 29 of the Laws of Hong Kong) or the equivalent overseas) having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40 million or its equivalent in any foreign currency at the relevant date (see below) or-

(i) as stated in the most recent audited financial statement prepared-

(A) in respect of the trust corporation; and

(B) within 16 months before the relevant date;

(ii) as ascertained by referring to one or more audited financial statements, each being the most recent audited financial statement, prepared-

(A) in respect of the trust or any of the trust; and

(B) within 16 months before the relevant date; or

(iii) as ascertained by referring to one or more custodian (see below) statements issued to the trust corporation-

(A) in respect of the trust or any of the trusts; and

(B) within 12 months before the relevant date;

(l) any individual, either alone or with any of his associates (the spouse or any child) on a joint account, having a portfolio (see below) of not less than HK$8 million or its equivalent in any foreign currency at the relevant date or-

(i) as stated in a certificate issued by an auditor or a certified public accountant of the individual within 12 months before the relevant date; or

(ii)  as ascertained by referring to one or more custodian statements issued to the individual (either alone or with the associate) within 12 months before the relevant date;

(m) any corporation or partnership having-

(i) a portfolio of not less than HK$8 million or its equivalent in any foreign currency; or

(ii) total assets of not less than HK$40 million or its equivalent in any foreign currency, at the relevant date, or as ascertained by referring to-

(iii) the most recent audited financial statement prepared-

(A) in respect of the corporation or partnership (as the case may be); and

(B) within 16 months before the relevant date; or

(iv) one or more custodian statements issued to the corporation or partnership (as the case may be) within 12 months before the relevant date; and

(n) any corporation the sole business of which is to hold investments and which at the relevant date is wholly owned by any one or more of the following persons-

(i) a trust corporation that falls within the description in paragraph (k);

(ii) an individual who, either alone or with any of his or her associates on a joint account, falls within the description in paragraph (k);

(iii) a corporation that falls within the description in paragraph (m);

(iv) a partnership that falls within the description in paragraph (m).

For the purposes of paragraphs (k) to (n) above:

  • “relevant date” means the date on which the advertisement, invitation or document (made in respect of securities or structured products or interests in any collective investment scheme, which is intended to be disposed of only to professional investors), is issued, or possessed for the purposes of issue;
  • “custodian” means (i) a corporation whose principal business is to act as a securities custodian, or (ii) an authorised financial institution under the Banking Ordinance (Cap. 155 of the Laws of Hong Kong); an overseas bank; a corporation licensed under the SFO; or an overseas financial intermediary, whose business includes acting as a custodian; and
  • “portfolio” means a portfolio comprising any of the following (i) securities; (ii) certificates of deposit issued by an authorised financial institution under the Banking Ordinance (Cap, 155 of the Laws of Hong Kong) or an overseas bank; and (iii) except for trust corporations, cash held by a custodian.

Institutional Investor / Accredited Investor Definition

An institutional investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(a) the Singapore Government;

(b) a statutory board as may be prescribed by regulations made under section 341 of the SFA, as prescribed in the Second Schedule of the Securities and Futures (Classes of Investors) Regulations 2018;

(c) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is —

(i) to manage its own funds;

(ii) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or

(iii) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country;

(d) any entity —

(i) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and

(ii) whose funds are managed by an entity mentioned in sub‑paragraph (c);

(e) a bank that is licensed under the Banking Act 1970;

(f) a merchant bank that is licensed under the Banking Act 1970;

(g) a finance company that is licensed under the Finance Companies Act 1967;

(h) a company or co‑operative society that is licensed under the Insurance Act 1966 to carry on insurance business in Singapore;

(i) a company licensed under the Trust Companies Act 2005;

(j) a holder of a capital markets services licence;

(k) an approved exchange;

(l) a recognised market operator;

(m) an approved clearing house;

(n) a recognised clearing house;

(o) a licensed trade repository;

(p) a licensed foreign trade repository;

(q) an approved holding company;

(r) a Depository as defined in section 81SF of the SFA;

(s) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere;

(t) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;

(u) a designated market‑maker as defined in paragraph 1 of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations;

(v) a headquarters company or Finance and Treasury Centre which carries on a class of business involving fund management, where such business has been approved as a qualifying service in relation to that headquarters company or Finance and Treasury Centre under section 43D(2)(a) or 43E(2)(a) of the Income Tax Act 1947;

(w) a person who undertakes fund management activity (whether in Singapore or elsewhere) on behalf of not more than 30 qualified investors;

(x) a Service Company (as defined in regulation 2 of the Insurance (Lloyd’s Asia Scheme) Regulations) which carries on business as an agent of a member of Lloyd’s;

(y) a corporation the entire share capital of which is owned by an institutional investor or by persons all of whom are institutional investors;

(z) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005) in which each partner is an institutional investor.

An accredited investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:

(i)  an individual —

(A) whose net personal assets exceed in value $2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(B) whose financial assets (net of any related liabilities) exceed in value $1 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount, where “financial asset” means —

(BA) a deposit as defined in section 4B of the Banking Act 1970;

(BB) an investment product as defined in section 2(1) of the Financial Advisers Act 2001; or

(BC) any other asset as may be prescribed by regulations made under section 341; or

(C) whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

(ii)  a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —

(A) the most recent audited balance sheet of the corporation; or

(B) where the corporation is not required to prepare audited accounts regularly, a balance sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance sheet, which date must be within the preceding 12 months;

(iii) A trustee of a trust which all the beneficiaries are accredited investors; or

(iv) A trustee of a trust which the subject matter exceeds S$10 million; or

(v) An entity (other than a corporation) with net assets exceeding S$10 million (or its equivalent in a foreign currency) in value. “Entity” includes an unincorporated association, a partnership and the government of any state, but does not include a trust; or

(vi) A partnership (other than a limited liability partnership) in which every partner is an accredited investor; or

(vii) A corporation which the entire share capital is owned by one or more persons, all of whom are accredited investors.

Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).