Lazard's observations on a rapidly evolving market
2018 was another record year for the sponsor secondary market, as favorable supply and demand dynamics drove significant volume for this segment of the secondary market.
Key observations from the 2018 Year-End Review include:
- 2018 was a big year in the U.S.
The U.S. overtook Europe as the largest source of deal volume in the market. The shift was largely due to a decline in European real asset transactions and an increase in U.S. transaction flow, especially by large-cap sponsors.
- Increased breadth and depth in the buyer market.
Secondary firms continue to raise substantial pools of capital as LPs continue to increase allocations to private equity and to the secondary market specifically. Most new entrants into the secondary market focus on the financial sponsor segment, which creates additional breadth and depth, resulting in creative solutions and increased transaction flow.
- Expanded scope of venture capital secondaries.
Direct venture capital secondaries have typically involved transactions of interests in one company. 2018 saw several venture capital firms, most notably NEA, access the secondary market to create portfolio-level liquidity solutions.
- Growing profile of independent sponsors.
Based on publicly available information our client, Argonne Capital, was the largest independent sponsor transaction to close in 2018. Independent sponsors are making use of the secondary market to create liquidity for early investors and to establish their first institutional pool of capital.
- Continuing interest in Asia.
Asia continues to be a significant source of sponsor secondary deal flow as sponsors seek alternative routes to liquidity in a complex capital market region. Transactions by Capital Today, TPG Asia, L Catterton Asia and Standard Chartered Private Equity drove substantial deal volume.
- Notable single-company solutions.
The sponsor secondary market was traditionally used to find portfolio solutions, with only a small number of transactions involving a single company position. In 2018, several notable transactions involving single company positions closed, including those by Capital Today, PAI, Lime Rock and TDR.
Lazard believes that the sponsor secondary market will represent a meaningful percentage of the broader secondary market in 2019, as it continues to be viewed by financial sponsors as a legitimate pathway to addressing liquidity and capital needs.
 Standard Chartered Private Equity was in the process of closing as of December 31, 2018.