Secondaries, an Area in Which Class in Speed, However in Volume Representing European Gps Are Particularly Active

Opportunities in the European Private Equity Secondary Market - 3 4 - Opportunities in the European Private Equity Secondary Market TABLE OF CONTENTS Executive summary.........................................................................................6 1. A thriving private equity secondary market....................................8 2. Key opportunities for investors..........................................................16 3. Attractiveness of secondary PE investments across economic cycles ..............................................................................................................20 4. Secondary market outlook..................................................................26 5. Resilience of the secondary market in the face of a recession and development prospects....................................................................31 Opportunities in the European Private Equity Secondary Market - 5 EXECUTIVE SUMMARY The private equity (PE) secondary market has LP interest, whereas now a balance between experienced strong and unprecedented growth LP interest and GP-led transactions has been over the past few years, gaining substantial found and managers proactively approach the market momentum and, thus being one of the secondary market. The growing share of GP- most important developments in PE as an asset led deals can be explained by overall market class. This growth has mainly been driven by maturity together with overall higher pricing the sharp upturn in the PE market, reaching levels leading to innovative and more complex circa $5.1 trillion in commitments globally as solutions. GPs aim to optimize fund liquidity and of Q1 20201. Growth in the global secondary to speed up the pace of distribution to their market has surpassed that of the PE asset LPs by means of secondaries, an area in which class in speed, however in volume representing European GPs are particularly active. only 6%2 of total PE commitments, thus leaving high potential for further expansion. The secondary market has become a reliable tool Amidst the uncertainty surrounding the to diversify and optimize assets allocation and final economic impact of the current global to gain rapid exposure to PE funds (which seems pandemic, the appetite for long-term unlisted justified especially in a low-yield environment) asset classes should not be eroded despite while shortening the J-curve and securing the understandable short-term wait-and-see access to resilient exposure. Secondaries offer approach. Non-listed companies still have the an attractive risk- return profile, inter alia for the same solid fundamentals that have supported following reasons: the structural increase in allocations for years (better average performance across cycles, • Exposure to mature underlying companies low interest rate environment, investments in that are not yet valued by the market; the real economy, natural integration of ESG • Reduced investment risk/ lower dispersion practices, etc.). of returns; • Reduced blind-pool risk; The secondary market has matured, shifting • Accelerated and diversified exposure by away from a niche market characterized back-filling older vintages; by distressed sellers trading at significant • Cash efficiency with money at work from discounts, to an active marketplace focused day one; on value creation with a growing number of • Shorter investment holding periods. increasingly sophisticated participants. In the early days of secondaries, assets were often The European secondary market is driven sold at a significant discount to NAV. Today, by an increasingly sophisticated buyers and buyers are willing to accept higher prices for sellers universe, the proliferation of regulation attractive investment opportunities with an and the gradual expansion of the European PE embedded upside, while sellers are motivated primary market, all together offering growing to lock in attractive returns, generate liquidity opportunities for institutional investors. More and rationalize their portfolios. This explains the specifically the small to mid-cap segments are material increase of volume of the secondary broader and more diversified than both their market. Unlike the global financial crisis (“GFC”) equivalent public market and US PE market that led to a liquidity crisis, the current recession, in terms of available companies and type of linked to the Covid-19 pandemic, occurs in a underlying sectors. In addition to this, two context where cash is not necessarily in short characteristics of the secondary market offer a supply, thus limiting the number of distressed favorable environment for institutional investors sellers and maintaining relatively stable prices. in light of the economic environment: Another sign of market maturity is an evolving 1. As we enter into recession territory, and nature of secondary transactions. In its early on condition that a bottom-up analysis of days, the market was mostly dominated by target portfolios is carried out, secondary 1Source: Preqin, as of April 2020 2Source: Preqin, as of April 2020 6 - Opportunities in the European Private Equity Secondary Market transactions are a way to buy mature and quality assets, at attractive valuations acting as a portfolio hedge, reducing volatility and securing long term risk-return profile; 2. Whether it is about the risk-return profile of the funds based on their end of life performances or their cash flow characteristics in the short-medium term, Secondary funds seem to be of particular interest during economic downturns as seen during the GFC with a resilience in performances and above market returns. Entering the secondary market therefore offers an accretive strategy to other private market strategies but requires the right expertise and experience to source and assess the best deals and funds. Secondaries can be an efficient portfolio tool to build robust portfolios investing in resilient and funded assets while reducing blind pool risk associated with new private market funds as well as withstanding various economic and financial cycles. However, they require a selective investment approach that is versatile enough to cover several different cycles. This paper includes an exclusive study from HEC Paris Professor Oliver Gottschalg, that explores the attractiveness of private equity across different economic cycles, with a particular focus on secondary investments (Section III, page 20). The results of this empirical analysis point to the attractiveness of private equity, notably secondary fund investments, during economic downturns. The report concluded that “a strategy of a relative overweighting of private equity within the portfolio, and in particular of secondary private equity fund investments within the PE allocation, may be an attractive strategy for limited partners in the current economic environment.” A THRIVING PRIVATE EQUITY 1 SECONDARY MARKET The PE secondary market has experienced strong and unprecedented growth over the past few years reaching $88bn in transaction volume 2019, a fourfold increase to 20083, and has become increasingly sophisticated, driven by the sharp upturn in the PE market and a shift from niche to normal strategy in private markets. Within this illiquid asset class, secondaries have emerged as a liquidity solution to a growing number of investors and enabled them to exit long-term investment in an otherwise illiquid market be it for portfolio management or due to regulatory constraints. Initially, secondary transactions merely consisted of opportunistic purchases of LP interests in private equity funds or portfolios of funds. Buyers then took on primary LP commitments to meet future capital calls in the remaining assets. This segment grew rapidly when public market conditions depreciated following the GFC and some investors found themselves with-greater-than anticipated needs for liquidity and overweighed private market allocations due to denominator effect Secondaries have since grown rapidly into a well-structured asset class at the core of investors’ asset allocation strategies departing from its early opportunistic use. For investors, secondary private equity strategies can be an effective way to gain access to attractive risk-adjusted returns, J-curve mitigation while rapidly increasing exposure and diversification and provide an attractive cash flow profile. A secondary transaction refers to the sale by an existing investor of its interests in a fund or a portfolio of funds to a third-party buyer. Rapid growth in the global secondary A market… The private equity asset class is illiquid by nature even at a loss – saw secondaries as an efficient and thus considered as long-term investments exit option. At that time, secondary transactions (over 10 years) for investors (known as “Limited comprised mostly of portfolio liquidations from Partners” or “LPs”). A robust, mature secondary distressed sellers in need of short-term liquidity market has developed over the last two decades or strategic rebalancing, generally at a high as secondaries have become an efficient way discount. for LPs to diversify and manage their portfolios. Deals have increased significantly worldwide, The recent bull market changed investors’ even in the aftermath of the global financial perception on the asset class and secondaries crisis partly driven by windfall effects as became not only a recognized tool for portfolio investors wishing to rebalance their allocations management but a private market strategy and reduce unfunded private equity

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