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Co-investment and secondaries reign comes to the fore in 2024’s PE channels

After a stellar two years for private equity, the global market stalled in 2023 amidst challenging conditions. The switch called for agility, with Neuberger Berman finding other ways to get deals going that put distributions in the hands of investors.
Private Equity

Private equity is going through a tough stretch globally, with tight debt markets and higher costs adding to inflationary pressure and what Neuberger Berman managing director José Luis González Pastor calls a “new era for multiples”.

The challenges, he told a room full of financial adviser at The Inside Network’s recent Alternatives Symposium in Melbourne, are clear: “There is a gap between what the buyers and the sellers are willing to transact for,” he said. “There’s valuation uncertainty, and as a result we’ve seen distributions to investors dry up a result of fewer transactions.”

While reluctant to overstate the dearth of available deals in the marketplace (“It’s not dramatic,” he said. “I don’t want to over-emphasize it…”) Pastor acknowledged that the M&A volume is probably at around a ten year low, which is felt all the more keenly because the two preceding years were all-time highs.

  • To alleviate this inactivity, however, the managing director explained how the $460 billion, New York based Neuberger Berman is harnessing co-investment opportunities and secondary transactions as a vehicle to invest into private equities assets.

    The former of those options, co-investment, is relatively straightforward to understand: “We basically partner with private equity managers, and we invest directly into the same company that they are investing, or that they have invested,” he said.

    The latter is a little more convoluted, but equally palatable in a market where direct PE deals are scarce.

    “For secondaries, there are two types of secondary transactions; ones that are what we call LP-led, or limited partner lead. So basically, if I’m an investor and I want to sell my interest, I find a secondary buyer like ourselves that can buy that interest from you,” he said. “Or there’s GP-led, where the general partner owns the assets and once they find a solution for it [they] probably to put it into a new fund. So that’s the two differences.”

    What makes all these secondary options possible is that despite the challenges, there are still partners looking to get their hands on liquidity, Pastor explained. That need doesn’t go away, despite market dynamics.

    “Basically, a lot of limited partners like ourselves are saying ‘Why don’t you sell your assets and distribute some capital back?'” he said. “On their side it’s like ‘Look, capital markets are already shut down. I cannot IPO my companies and I don’t get the price that I want on the market when I’m running an auction, so I’d rather stay with these assets because they are actually growing a lot on their compounded returns. And then we’re going to have the follow up conversation to that. That’s that’s the background of the opportunity.

    And there are even more reasons why partners might be willing to share some equity, Pastor believes.

    “They also may want to get or seek some liquidity to derisk their best performing investment [and] take some chips off the table. Sometimes they may have some mature assets that they have been sitting in the performance for a while, and given what has happened over the last three to four years between COVID exuberance and now the current market today, they have not been able to exit and then you’d have solution for that.

    “And then lastly, they may also want to have more liquidity to complete more M&A,” he added. “Some of these companies probably started the M&A route when debt was much cheaper and availability of debt was much higher, so they are running out of gas.”

    Tahn Sharpe

    Tahn is managing editor across The Inside Network's three publications.

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