Exploring the Future of GP-Led Secondaries in the Middle Market: Insights from Industry Leaders at Ropes & Gray Forum

Last week we had the honor of hosting New Second Capital and a full house of GPs and LPs for a forum on GP-led secondaries in the middle market. Huge thanks to each of our speakers: Nigel Dawn (Evercore), Laura Hotaling (MLC Asset Management), Tjarko Hektor and Clay Cole (New Second Capital), and Adam Dobson (Ropes & Gray).

Bullish Outlook on Middle Market Opportunities for GP-Led Transactions

Across the board, our panelists were bullish on middle market opportunities for GP-led transactions, with a sweet spot in the $200-700 million range, noting that:

• The opportunity set is wide;
• Businesses often have opportunities to grow organically;
• Exit timelines can be better because there’s a more active buyer group;
• Overall it offers good risk adjusted returns; and
• The quality of management is crucial.

The Undercapitalization Challenge and the Anticipated Arms Race for Capital

Our speakers also shared the view that the middle market GP-led market is ‘pathetically’ undercapitalized with an arms race for capital, but that they expect the market to look very different (including much larger) in a few years.

Predicted Shift Towards Specialist Secondary Buyers

One prediction offered is that much as we’ve seen a shift toward specialist strategies within PE/buyout, we are likely to see a pivot toward specialist secondary buyers. To some extent this is happening already – with credit-, infrastructure- and single-asset-focused secondary funds – but much as we now have technology- and consumer-focused buyout funds, we may see secondary buyers similarly so specialize. 

As part of the anticipated expansion of the market, including through new entrants, another prediction by our panelists is that we’ll see a shift toward permanent capital vehicles over time. 

Evolving LP Views on GP-Led Secondaries: A Tool in the Toolkit

Another question is what we predict for LP views of the GP-led market. Historically many LPs were skeptical of GP-led transactions, but in recent years LPs’ views have evolved and many are starting to view GP-led secondaries as another tool in their toolkit. Secondaries also offer an opportunity for an LP to deploy and rebalance capital quickly. Our panelists expect we’ll continue to see LPs accept and even embrace GP-led secondaries, with growth driven by the middle market. 

Only time will tell how accurate our panelists crystal balls were, but their discussion made for an engaging and thought-provoking evening. 

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