Jeffrey Akers is a partner and the head of secondary investments at Adams Street, based in Chicago. Principally focused on North America, he heads all aspects of the firm’s secondary business, including strategy, fundraising, and portfolio construction. 

We saw record volumes of GP-led secondaries last year. Can this level of growth be sustained?

We’re bullish on growth in the GP-led market, as these transactions benefit all constituents in the marketplace. They allow GPs to double down on their best assets, enable LPs to get liquidity out of funds, and we buyers can invest in trophy assets from our favorite GPs without assuming change of control risk.

One of the big questions the market is asking is, what will the impact of an increase in M&A volumes be on deal flow? Is there still potential for growth when that happens? In our view, the answer is a fairly resounding yes. GP-led technology allows GPs to capture value and therefore brings benefits beyond just maximizing liquidity for investors. We saw strong GP-led volumes in 2021 during a robust M&A environment.

Are we likely to see more middle and lower-middle-market GPs use continuation vehicles?

Absolutely. Our pipeline of new opportunities -and where we see intermediaries pitching business- is currently heavily skewed toward the middle market and lower middle market. Part of the reason for this is that the stigma has been fully removed from continuation vehicles, and they are viewed by the market broadly as a liquidity tool for sophisticated GPs.

Smaller firms are learning the value of doing these deals, just as we saw at the large end of the market.  We also believe execution risk is lower in smaller middle-market deals given smaller buying syndicates.

What are some of the challenges secondary buyers are facing in today’s GP-led market?

One trend we are seeing is that LPs in secondary funds are looking deeper at the underlying exposure they have in the secondary funds they’re invested in. They want to avoid overlap between funds, as this creates concentration.

As a result, secondary buyers are becoming more discerning about participating in heavily syndicated transactions, which is further reducing the availability of capital in those deals and further heightening the ongoing undercapitalization of the GP-led market. In response, intermediaries and GPs are becoming savvier in putting together transactions with lower execution risk.

As for GPs, I expect them to show increasing alignment by investing more money alongside us in GP-led transactions, to show their conviction in the companies. I expect pricing to tighten a little bit to reflect the lower risk profile that we see in these deals, relative to a traditional change of control buyout.

How do you weigh the balance between investing in multi-asset versus single-asset CVs?

Pertaining to multi-asset deals, when we raise money from our LPs, we make a “promise” that is threefold. One, we are going to offer investors early gains; some sort of near-term value appreciation is expected. Second, as this is a shorter-duration form of private equity, we’re going to start getting distributions out of these investments earlier because we’re investing closer to the point of liquidity. Third, we’re getting the benefits of diversification, and we’re lowering risk because the outcomes that we’re investing in are theoretically more predictable.

Single-asset GP-led deals involve trophy assets, but tend to be done at higher prices, close to par. They tend to be longer-duration investments as they are re-setting timing for the GP, and they’re naturally more concentrated.

Multi-asset GP-led deals tend to exhibit more traditional secondary characteristics, since they price at larger discounts, offer more potential for early liquidity, and are naturally more diversified.  Therefore, while we invest in high conviction single asset GP-led deals for a portion of our fund, we limit their overall exposure to ensure our overall fund profile and risk/return is optimized.

One trend we’ve started to notice is an increase in CVs on existing CVs, sometimes referred to as proliferation funds or ‘secondaries within secondaries’ deals? Is this a trend you are noticing?

Yes, I think we’re going to continue to see it. When we source a GP-led transaction, it’s typically around a company or set of companies that the GP would want to own forever, and the traditional PE fund structure just does not allow that.

While [the CV] extends the life of those assets, it still has a finite life on it and we still are seeking liquidity as a secondary buyer in those assets, so it’s not a surprise at all that we would see CVs on existing CVs. It’s happening in Europe, and I think it’s happening in the US as well. As the wave of single and multi-asset GP-led deals matures, those funds are trying to create liquidity for investors and it’s coinciding with a time when M&A options can be lacking. We view that as a good thing; it’s providing a source of liquidity for more mature CVs. For great companies, it’s allowing us to consider rolling our ownership again or investing new capital from our new funds in those companies.

What is driving deal flow in the LP-led market?

We are incredibly bullish on both growth in the traditional LP market and continued sources of market inefficiency that should make it a buyer’s market. Continued growth is contingent on two things. First is the inventory of available private equity that investors could sell. Second is the churn rate – the portion that sells every year- of outstanding NAV (net asset value) in the market.

Due to record levels of fundraising over the last 10 years, coupled with very low levels of sale activity for private equity funds in a muted M&A and IPO market, private equity NAV has ballooned to record levels. The lack of liquidity has created motivated sellers, and selling private equity assets is often the easiest and fastest way to create liquidity.

We like market growth at Adams Street, but we’re focused on finding market inefficiencies.  Our firm relies on deep GP relationships for due diligence and process advantages, with a focus on the lower middle market. This is a highly targeted approach focused on high quality at low prices, and smaller transactions with less traffic from large buyers.  We believe these attributes position us to find transactions that can deliver above-market returns.

What impact are 40 Act Funds having on the secondary market?

We’ve seen rapid growth of semi-liquid evergreen products over the last several years. They’re appealing to the private wealth channel because they avoid some of the headaches or pitfalls of traditional commingled funds, in particular, delayed drawdowns, limited liquidity options, and maybe most importantly, a requirement to file K-1s for taxes.

There’s a particular appetite among evergreen funds for diversified traditional LP secondary transactions, especially those with older assets that have a shorter duration profile.

We’ve certainly seen aggressive pricing behavior on the part of certain 40 Act funds, in some cases paying as much as 500bps to 1000bps higher than the cover bid on transactions. However, they still represent a very small minority of the overall market so their impact on pricing of a majority of the market is minimal.  As they mature, we expect 40 Act funds to price transactions more in line with traditional closed-end funds