NYPPEX January 2022 Review & Outlook Secondary Markets for Alternative Funds Worldwide

Secondary Private Equity Market Commentary
by Laurence G. Allen

NYPPEX, one of the world’s leading providers of secondary private equity liquidity and data, today announced its January 2022 review and outlook for the secondary markets for Alternative Funds worldwide as follows:

1. Bids Remain Stable Despite Stock Market Volatility

For January 2022, in general, we believe secondary bid prices for many alternative funds remained relatively stable despite stock market volatility. In the private wealth sector, which are commitments to feeder funds for $5 million and lower, we estimate bid indications ranged from 74.10 to 92.50 expressed as a percentage of September 30, 2021 net asset values. In the institutional sector, which are commitments greater than $5 million, we estimate bid indications ranged from 79.50 to 97.75 expressed as a percentage of September 30, 2021 net asset values.

2. We Expect Valuation Multiples to Contract Beginning in the 2nd Quarter 2022

As the U.S Federal Reserve increases interest rates, we expect valuation multiples to contract particularly for private companies that do not generate earnings or are financed with significant leverage. Therefore, we expect secondary bid prices to decline for many venture funds as well as buyout funds.

3. Attractive Investment Opportunities in Income Funds

We believe income oriented funds such as loan and credit funds, offer attractive risk/return profiles and a higher probability for positive returns in 2022.

4. Secondary Volumes to Increase Substantially

In 2022, NYPPEX projects that current deal momentum will continue and secondary transaction volume will increase significantly by 32% to approximately $122.1 billion worldwide for the industry. In 2021, NYPPEX estimates that secondary transaction volume increased approximately 63% YOY to $92.5 billion worldwide for interests in alternative funds and securities in private companies. In 2020, COVID adversely impacted the secondary markets causing an estimated 24% decline in transaction volume to approximately $56.7 billion compared to $74.5 billion in 2019.

5. Secondary Price Discounts to Increase

In 2022, NYPPEX projects that secondary purchase discounts will increase both to net asset values (funds) and valuations of capital rounds (companies) due to investor’s renewed concerns about the impact of COVID on businesses.

6. Private Client Capital to Increase Substantially to Alternative Funds

In 2022, NYPPEX projects that private client individual retirement plans will significantly increase capital commitments to alternative funds due to (a) the passage of the U.S. Setting Every Community Up for Retirement Enhancement Act in 2019 – which enables multiple employers without affiliation to pool plans and more easily access minimum investment allocations in alternative funds, and (b) a 2020 clarification statement by the U.S. Department of Labor that allows private equity investments to be included in individual’s retirement plans, driven by request letters from Pantheon Ventures and Partners Group. We expect this trend will cause significantly higher secondary transaction volumes in 2023 among private client limited partners.

7. Corporations will Continue Asset Sales

In 2022, NYPPEX projects that corporations will continue to “carve out” and divest holdings in slower growth businesses as they reposition to higher growth businesses.

8. GP-Led Secondaries to Increase, Particularly Continuation Funds

In 2022, NYPPEX projects that GP-led secondary transactions will continue to comprise 40% or more of total volume, particularly in the use of “continuation funds” which enable single assets to continue to be held and managed by GPs. In 2021, Clayton Dubilier & Rice sponsored a noteworthy continuation fund to transfer its estimated 61% stake in Belron and received co-investments from Hellman & Friedman and Blackrock.

9. European Asset Sales to be Significant

In 2022, NYPPEX projects that sales of European assets will comprise a significant percentage of secondary transactions worldwide, driven by the ongoing adverse impact of COVID particularly on European businesses.

10. Secondary Buyers to Seek More Credit & Income Funds

In 2022, NYPPEX projects that secondary buyers will increasingly seek interests in credit funds for stable income returns, due to concerns about contracting valuation multiples as inflation, interest rates and tax rates increase.

11. Valuations to Increase for Online Services Businesses in Alternative Assets

In 2022, NYPPEX projects that online service businesses in alternative assets will continue to command significant relative valuations as evidenced by the estimated $4 billion valuation for Forge Global (via SPAC), a secondary marketplace for shares in venture backed private companies and the estimated $6 billion valuation for iCapital Network, which provides access to alternative funds for private wealth investors. NYPPEX believes the above valuations compare favorably to the estimated $1.75 billion valuation for Lexington Partners acquired by Franklin Templeton and the estimated $1.08 billion valuation for Landmark Partners acquired by Ares in 2021.

12. SPVs to Continue for Secondary Investments in VC-Backed Companies

In 2022, NYPPEX projects that special purpose vehicles (SPVs) will continue to be popular deal structures for direct investments in venture-backed private companies.

13. New Secondary Buyers Will Gain Market Share

In 2022, NYPPEX projects that new secondary buyers will continue to increase their market share of secondary transactions. To illustrate, in 2021, Blackrock’s inaugural secondary fund led the estimated $1.2 billion acquisition of private equity assets sold by Mubadala Capital, the asset management subsidiary of a $243 billion sovereign wealth fund in the UAE, which was in addition to Blackrock’s $400 million commitment to Mubadala’s 3rd private equity fund.

14. Former Founders Will Continue with Personal Investments

In 2022, pioneer founders of the alternative asset industry will continue to remain active. To illustrate, David Rubenstein, a co-founder of the Carlyle Group, started his own family office, Declaration Partners, which has made an estimated 23 direct investments typically in Series B through F rounds.

For further information or to schedule a confidential call with a Principal at NYPPEX, please contact Kelly Londono at +1 (914) 305-2825 or inquiries@nyppex.com.

About NYPPEX Holdings

NYPPEX Holdings operates a global private marketplace that provides price data and the opportunity for qualified investors to access secondary liquidity in alternative investment funds in a fair and ethical manner. Its clients include alternative investment funds, financial institutions, endowments, foundations, institutional investors, family offices, private clients and their respective advisors worldwide.

Since 2004, the NYPPEX QMS™ has been formerly recognized by the U.S. Internal Revenue Service as a Qualified Matching Service for private partnerships though a private letter ruling under Internal Revenue Code §1.7704.

Its private securities are privately offered only to qualified investors through NYPPEX, LLC and only in jurisdictions were permitted. NYPPEX is regulated in the U.S. by the SEC and FINRA. Member FINRA, SPIC.

Disclosure: This information is market commentary by NYPPEX and is not a solicitation of private securities transactions which may only be done through private offering documents and in jurisdictions where permitted. Investors should not rely on the information in this commentary as the basis for making investment decisions. This commentary is provided for informational purposes only. You are strongly encouraged to consult with your own independent advisors regarding any issues discussed in this commentary.

Private placements are illiquid, speculative and investors may lose their entire investment.