Primary Market Spotlight 

The second half of 2023 saw the reopening of the primary market. Limited partners (LPs) were more engaged with sponsors and showed a willingness to make commitments as they prepared for a more robust pipeline and allocations in 2024. This was driven in part by an easing of the denominator effect that we saw earlier in the year as public markets rebounded, as well as general partners (GPs) increasingly finding ways to generate liquidity for LPs with improving M&A and secondary markets. This has started to increase distributed paid-in capital (DPI)—a leading benchmark for investors in deciding their commitments. We expect this steady momentum to continue as we move through 2024. 

There is significant dry powder in the market and sponsors are feeling pressure to deploy as more favorable economic conditions prevail.  While a sponsor used to be back in the market fundraising at 50% deployed, LPs now want to see a fund more fully deployed (in the 70-80% range) before coming back. This pressure to deploy will in turn create liquidity elsewhere in the market and should have a compounding effect for private equity more broadly. Given this, as well as a focus on existing funds and assets, sponsors are slower in coming back to market and are launching fewer adjacent strategies. This is creating less stress in the market and allowing LPs to focus on traditional re-ups and new commitments.  

As sponsors return to the primary market in 2024, the proper sizing of those funds will be instrumental in delivering a successful outcome. Some clients are opting to raise smaller funds that can be deployed quickly while others are opting for a rolling first close to help demonstrate momentum and strength in the fund. Regardless of approach, we believe there will be a return to normalcy in 2024 that will set the stage for accelerated growth in 2025. 

Secondary Markets

Renewed Growth, Increasing Selectiveness 

While investor interest in the secondary market continues to steadily grow, 2023 saw some softness and caution due to the combined influence of macroeconomic uncertainty, dry powder constraints, and risk-averse investment committees. And because recent M&A market conditions delayed some portfolio company exits, more private equity groups looked to continuation vehicles (CVs) to generate liquidity, impacting supply and demand dynamics and creating a buyer’s market. 

In this environment, secondary investors sought lower-risk, higher-quality assets with strong historical performance in resilient sectors. The bar was particularly high for single-asset CVs in 2023, while the inherent diversification of multi-asset CVs increased their investor appeal. In fact, while single-asset CVs accounted for most transactions from 2020 to 2022, 2023 saw more investor interest in multi-asset transactions. 

For secondary investors, the healthcare, technology, business services, and consumer services sectors were especially active due to their generally strong recurring revenue and above-average performance. In these and other industries, private equity increasingly sought to differentiate their secondary transactions via rollover of 100% of their GP proceeds and incremental cash commitments from their latest funds. We estimate that between 2021 and 2023, participation of private equity groups’ latest funds in Harris Williams-advised single-asset CVs grew from around 20% to approximately 70%¹. Such commitments, plus private equity groups’ reputations, strategies, and familiarity with investment committees were defining factors of successful secondary transactions in 2023.

A Resurgence in the Works 

As 2024 gets underway, investors remain focused on quality, yet are also showing more eagerness to deploy capital, setting up the potential for significantly higher transaction volume. In addition to continually improving macroeconomic conditions, several factors are at play.  

For example, there is significant dry powder available for new investments due to 2023 funding closes. We estimate $180 billion of dry powder in the global secondary market as we kick off 2024², and we expect solid fundraising numbers for the first half of 2024, including new capital for dedicated private equity-led strategies. We also anticipate an increased desire among secondary investors to deploy dry powder in 2024 after a constrained 2023, which should accelerate syndication processes and attract larger commitments. 

Likewise, we believe private equity valuation adjustments will reduce bid-ask spreads, making CV pricing more attractive. Many sellers are increasingly willing to accept discounts, when doing so enables them to reinvest with crucial manager relationships. At the same time, the increased use of deferred proceeds, debt, or preferred equity in transactions should further bridge bid-ask spreads, driving increased transaction volumes. 

And, as private equity and investors steadily become more educated and creative regarding secondaries, transaction volume and value should continue to grow. We expect private equity groups’ latest funds to continue to participate in CV transactions to demonstrate conviction and alignment, and thus differentiate these opportunities in an increasingly crowded market. At the same time, private equity will remain under pressure to deliver DPI and will look to the secondary market to achieve that goal. 

Relatedly, a growing number of new investors will provide steady demand for secondary transactions in 2024. We anticipate that new private equity-led, focused funds will launch as the market grows, and that LPs will seek to back differentiated secondary strategies. We also expect the supply of CV transactions to exceed incumbent lead investor capital, and for many LPs to continue to prioritize liquidity over rollover options, providing new entrants with plentiful opportunities to participate in competitive secondary processes. 

Overall, 2024 has strong potential for a reinvigorated expansion of secondary investing, especially for top-quality, resilient businesses with healthy cashflow, strong margins, and solid potential for EBITDA growth. As more investors become familiar with CVs and their many benefits, we expect even higher participation among those seeking proven performance and superior growth.

Against this backdrop, we continue to marry our private capital advisory expertise with our deep industry knowledge to deliver superior outcomes for Harris Williams clients worldwide. Read more about the trends impacting the overall market >

¹  From SACVs and MACVs closed in the 2020-2023 period² Internal HW Analysis