Private Equity's Secondaries Window

The private equity market of mid-2023 is a study in contrasts. On one hand, the pipeline of new deals has slowed dramatically — rising interest rates have made leveraged buyouts significantly more expensive, and the bid-ask spread between buyers and sellers has widened as sellers resist marking down assets that were valued at peak multiples in 2021. On the other hand, the secondary market — where investors buy existing fund stakes and direct assets from LPs who need liquidity — is experiencing one of its most active periods in history.

The dynamic is familiar to students of private equity cycles. When primary markets freeze, secondary markets thaw. LPs who made commitments at the peak of the cycle — pension funds, endowments, family offices — are facing capital calls from funds that are still deploying, while distributions from mature funds have slowed as GPs defer exits in the hope of better market conditions. The result is a liquidity squeeze that is driving motivated sellers into the secondary market at discounts that have not been seen since the post-GFC period.

The opportunity for secondary investors is real, but it requires discipline. Not all assets being sold in the secondary market are worth buying at any price — some are being sold precisely because the underlying companies are struggling with the higher interest rate environment that has made their debt loads unsustainable. The skill is in distinguishing between assets that are being sold for liquidity reasons — where the discount reflects the seller's need rather than the asset's quality — and assets that are being sold because the seller has lost conviction in the underlying investment thesis.

At Lensbridge, secondaries have been a core competency since our earliest days. Our experience executing GP-led secondary transactions in Asia — including one of the first such transactions in the region — gives us a differentiated perspective on how to evaluate these opportunities. The current environment, with its combination of motivated sellers, wide discounts, and a pipeline of high-quality assets, is one of the most attractive we have seen for secondary investing in over a decade.