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Opinion Private credit
Secondaries have become an essential part of the private equity ecosystem
by Randy Schwimmer
Randy Schwimmer
Vice chairman
Churchill Asset Management
As PE funds hold companies for longer, GPs are finding new ways to generate distributions
One surprising aspect of growth and performance in private markets is how private equity has taken a back seat to private credit. The sharp drop-off of PE distributions is one reason, as the median hold period since 2021 for a portfolio company has lengthened over 20% to 6.5 years. Rate hikes, macroeconomic shocks such as COVID and inflation, and the corresponding slowdown in M&A, have disrupted the flywheel of private equity investing.
With distributions in short supply, both sides of the private equity trade face tough decisions. For GPs, it seems as if only higher quality assets are transacting, while dry powder remains at peak levels. Similarly, as LPs wait for distributions to redeploy to PE programmes, they scrutinise any new allocations or commitments.
Over the past 10 years the private equity industry has adapted. Tools have emerged for both GPs and LPs to improve liquidity and fill the distribution hole. In today’s market, cutting back on new deployment and waiting for distributions is not the only or best course of action.
Growing variety of secondaries
Traditionally, GPs had five options to generate distributions: selling a minority equity position or selling outright, executing a fund-to-fund sale, a dividend recapitalisation or an IPO. Now, private equity secondaries have gone from a cottage industry to an essential part of the private equity ecosystem. No longer seen purely as an option for distressed sellers, the asset class has proliferated in volume and sophistication. Institutional investors and managers alike turn to secondaries for portfolio optimisation. Varieties include continuation vehicles (CV), net asset value (NAV) facilities and fund level tenders.
GPs use CVs to recapitalise the equity of portfolio companies while keeping control of the asset. LPs are offered a liquidity option for their interest in those businesses, but also the option to roll over or reinvest proceeds alongside the GP to benefit from continued growth. NAV facilities are fund-level credit financings secured against the underlying portfolio assets. This solution offers GPs liquidity to distribute to investors at an attractive cost of capital without having to sell or liquidate equity positions in a suboptimal market.
A fund-level tender process occurs when a GP arranges for secondary buyers to set a market clearing price for the purchase of LP interests in legacy funds. This gives investors a means to sell all or a portion of their interests. Tenders grant the manager flexibility by providing LPs seeking distributions with an option. They also enable owners to retain control and extend the life of high performing assets.
Whether meeting the financial obligations of beneficiaries, funding new investments or balancing portfolio allocations, LPs must rethink their cash flow and liquidity management. Today’s dearth of realisations has driven LP secondaries to over USD 80bn of volume in 2024, up from USD 25bn in 2020.
Bundling flavours of equity and debt
Structured secondaries are customisable transactions that can be engineered to include a blend of common equity, preferred equity and/or debt. They can bundle multiple private equity fund interests into a managed portfolio sale that offers an efficient method for selling multiple investments. This allows investors to achieve liquidity while retaining some upside.
The expansion, sophistication and adoption of various solutions, along with the overall growth of the secondaries market, arms LPs with an expansive set of tools to manage liquidity effectively in an historically illiquid market. The need to access liquidity solutions is paramount in a world of reduced distributions. When considering these options, LPs should weigh their pros and cons against the various needs of their constituents.
What remains to be seen are the longer-term, structural impacts of the distribution dilemma. We expect that investors who pull back from the asset class will miss out — as we have seen play out in other market disruptions. Out of current market complexity clear winners and losers will emerge.
For LPs in particular, those with scale, diversified portfolios and a disciplined focus on quality will best adapt and thrive.
