PE secondaries booming in 2023? Reculer pour mieux sauter

VC and PE players seek refuge in the secondaries market to compensate for the dramatic decline in exit values. Does such a strategy demand the same scrutiny as a primary investment?

Dramatic declines and the quest for liquidity

Venture capital and private equity exit activity underwent dramatic declines in 2022.

In Europe, VC exit value saw a YoY decline of 72.2%, and PE exit values declined by 45.1% YoY. There is an even more dramatic effect in the US.

Due to the lack of available exit avenues, allocators have increasingly turned to secondaries as a potential route for liquidity.

The run on secondaries

Pitchbook states that the volume of secondary transactions nearly doubled since 2020.

A depressed exit environment accelerated this move. Exits are the primary source of liquidity for private market investors. Some allocators have been turning to secondaries to free up capital for future or existing capital calls.

The global annual secondaries transaction volume jumped from $60 billion in 2020 to an eye-popping $134 billion in 2021. The 2022 volume came in slightly lower at $111 billion.

This tremendous growth demonstrates significant demand for liquidity options.

Re-assessing your investment rationale

For both the buyer and the seller in the secondary market, it is essential to reassess the underlying investment rationale by asking questions such as:

• Are the market hypothesis still sound? Is underlying market growth impacted by inflation, energy, other political & economic circumstances, …?
• Has the competitive environment changed? How did competitors respond to market changes? Are there new players, alternatives,…?
• Is your management team still motivated and focused to succeed? Is the remuneration package sufficiently attractive?
• Do you have the right mix of people to execute your strategy?
• Is the culture of the company impacted by the economic or overall change?
• Is the innovation potential of the company still intact?

Adding depth to your view

NX Elicit's commercial, cultural, and innovation due diligence capability provides buyers and sellers in the secondary market with an answer to these questions.

With our dedicated approach, we return to the basics and (re)validate your (initial) investment hypothesis. For this, we look at changes in the market, the USP of the target product or service, and assess the target's change in culture and innovation potential.