Perspectives on the 2021 Secondaries Market and What May Lie Ahead in 2022

January 12, 2022
13:50 minutes

In this Ropes & Gray podcast, asset management partners Isabel Dische, Adam Dobson, Lindsey Goldstein and Vincent Ip, and tax partner Dan Kolb share key trends and developments from the 2021 secondaries market and what secondary buyers, sellers and fund sponsors can expect in 2022.


Adam Dobson: Hello, and thank you for joining us today on this Ropes & Gray podcast, the latest in our series of podcasts and webinars focused on topics of interest for asset managers and institutional investors. I’m Adam Dobson, a partner in our asset management group based in Boston. Joining me today are Isabel Dische, Lindsey Goldstein and Vince Ip, fellow asset management partners based in our New York and Hong Kong offices respectively, as well as Dan Kolb, a tax partner based in our New York office. Today, we are going to be looking back at key trends and developments from the 2021 secondaries market, and what secondary buyers, sellers and fund sponsors can expect in 2022.

Isabel, would you like to kick off our discussion?

Isabel Dische: Gladly—and what a year it was. 2021 started off with a bang and never stopped—deal volume was incredibly high. It was not uncommon for our team to be fielding more than 30 live fund recaps at the same time (and looking forward, there does not seem to have been any lull as we enter 2022).

Much like the M&A markets more generally, fund recapitalizations have been proceeding at a roar throughout the year, with a host of blue chip sponsors pursuing single asset deals, classic fund recapitalizations and even deals involving multiple vintages of funds. Continuing a trend from the past few years, we’ve seen more and more “top-tier” sponsors pursue fund recapitalizations. Fund recaps were embraced by sponsors and secondary buyers alike across asset classes and industries—with a number of multi-billion dollar recaps signed not only in the private equity space, but also in real estate and infrastructure. Many of these transactions involved a single underlying asset or had a large portion of the portfolio’s value concentrated in a single asset.

Related to this, we have seen a number of secondary buyers shift their fundraising strategy to raise products focused on these single asset opportunities. We’ve also seen a number of other focused secondaries strategies—for example, funds focused on preferred equity strategies or credit secondaries. 

Finally, we have seen a continued expansion in secondary buyers’ views of what constitutes a secondary.

Adam Dobson: Not only did fund recapitalizations—both portfolio level and single asset—continue to dominate, but as predicted given the 2020 pause, there was a mini-boom in classic portfolio sales, as well.

On the portfolio sale front, the boom seems to have been driven by a few factors. First, 2020 had witnessed a comparative freeze in the classic secondaries market as buyers and sellers reassessed their comfort with valuations in light of COVID-19. Those pricing concerns eased last year, and, in particular, on the sell-side, the rise in valuations drove sellers to go to market with a backlog of assets, while some sellers were simply opportunistic, taking advantage of the premium pricing available. We also observed a number of sellers driven to market because the upward movement in private equity valuations meant that they were over-concentrated toward private equity and needed to rebalance their portfolios so as to be able to continue to make new commitments to the space. On the buy-side, many secondary buyers whose own portfolios may have been slightly over-weighted toward recapitalizations shifted their focus toward portfolio purchases last year. Such concerns drove a number of multi-billion dollar sales by sovereign wealth funds and other large sellers in 2021, and already there are a number of such very large portfolio sales in the works for 2022.

Another noteworthy trend in 2021 was that a secondaries platform became a “must have” for multi-strategy managers. Historically, a handful of secondaries programs have resided within larger asset management platforms (AlpInvest Partners within the Carlyle platform, for example), but last year, we saw a number of fund sponsors acquire secondaries capabilities, either by hiring talent from established players or acquiring existing secondaries managers, such as in the acquisition of Landmark Partners by Ares, the acquisition of Lexington Partners by Franklin Templeton, or, in Europe, the acquisition of Montana Capital by Prudential.

Vince, do you want to speak to what you’ve been seeing in the Asian secondaries market?

Vincent Ip: Much as you’ve noted in the Americas, 2021 saw continued activity both with portfolio sales and a number of large fund recapitalizations and strip sales—including both recapitalizations of large private equity and credit portfolios. We also are seeing growth in the pool of secondary buyers who are pursuing these transactions—expanding beyond the classic secondary buyers who have had a footprint in Asia for a number of years to secondary buyers without an Asian presence.

In addition, because investors continue to show much appetite for investing in Asia, regional managers and emerging managers have continued to try to take advantage of this trend by using secondary market portfolios as a staple to primary fundraises.

At the same time, recent governmental actions have introduced an element of uncertainty to dealmaking in some countries, including China, and concentrated in certain sectors. However, even with such regulatory unpredictability, we have seen greater deal flow in other countries, such as Korea. Notably, in 2021, there were several large GP-led transactions involving Korean companies.

We’ve also seen continued interest in preferred equity financings. In particular, we’ve seen a number of these deals where a sponsor has used preferred equity to finance an expanded GP commitment to its fund.

Isabel Dische: Yes, that element of using the preferred equity deals to finance GP commits has also been increasingly common in the States. How does this compare with what you’re seeing in Europe?

Speaker: Much as in the Americas and Asia, secondary activity has boomed in Europe this past year—and as elsewhere around the globe, there is growing recognition of fund recapitalizations as a liquidity tool for fund sponsors, with interest from both global sponsors operating within Europe and more geographically-focused sponsors.

Activity also extended a shade further to the East, with the recapitalization of several large Middle Eastern portfolios as well as several Israeli venture sponsors taking advantage of the rise in valuations to generate some liquidity for their existing LPs through strip sales. 2021 saw the two largest secondaries to date in the Israeli market, and interest in these deals continues to grow.

Lindsey Goldstein: On the fundraising side, the past two years have seen a steady march of very large flagship secondaries funds being brought to market, with both seasoned secondary buyers and a number of new market entrants raising record levels of capital—and as we kick of 2022, there are several large flagships in, or about to enter, the market. The bulk of the capital raised has been focused on traditional PE secondary strategies, but we’ve also seen a number of sponsors launch more focused or bespoke strategies, such as funds focused on credit secondaries, preferred equity financings or single asset deals, and that trend we expect to continue in 2022.

We’ve also seen secondary fund sponsors reevaluate what they define as a “secondary” as they expand their sandbox’s request for alpha—and over the last year, we’ve fielded a lot of questions from fund sponsors about how they can expand the definition of “what is a secondary?”

The players also are changing. As noted by Adam earlier, not only have we seen a number of large asset managers add secondaries strategies to their platforms, whether by acquisition of existing secondaries advisers or by hiring teams, but we also have seen a number of new entrants raising funds targeted at smaller deals. 

Dan, do you want to speak to tax developments of note in the secondary market for the past year?

Dan Kolb: On the tax front, the most notable development was the further deferral—from January 1, 2022 to January 1, 2023—by the IRS of the secondary withholding requirement on fund sponsors to withhold on distributions to the buyer of a fund interest if the fund sponsor determines that the buyer, who has the primary withholding responsibility, has not withheld a sufficient amount on the transfer.

As our listeners may recall, due to an unfavorable court ruling in 2017, the U.S. government amended Section 1446 of the Internal Revenue Code to clarify that the sale of an interest in a partnership with a U.S. trade or business by a non-U.S. seller was taxable, and to impose withholding requirements on the buyer and underlying fund with respect to partnership interest transfers. The regulations generally require withholding whenever the buyer or underlying fund cannot, or in the case of underlying funds will not, provide appropriate certificates. As an example, while many sellers will be able to provide an exemption certificate based on the representation that their last three K-1s from an underlying fund reflect minimal or no ECI, if the underlying fund has not existed long enough to provide the seller with three K-1’s, or the fund has such limited contact with the United States that it does not issue K-1s, this exception does not apply. 

Because beginning on January 1, 2023 funds will have a withholding obligation on distributions to a buyer if the buyer does not properly withhold on the seller, buyers will want to make sure that sponsors of the funds in which they are buying interests agree with their withholding analysis. We expect that this fund withholding obligation will force funds to increase their involvement in the transfers and create a bit of fear in the buyer community.

Generally, the withholding obligation is 10% of the amount realized on the transfer, but that amount realized includes not only the purchase price, but also the seller’s allocable share of fund liabilities. The amount of assumed liabilities is a figure that will change practically daily. The Treasury Department has helpfully clarified that a buyer will not need to withhold more than 100% of the purchase price.

Note that to the extent a sponsor withholds on distributions to a buyer, that withholding would generate a tax credit for the seller, not the buyer—the threat of withholding by the sponsor will be a terrifying prospect for most secondary buyers. We’d expect that beginning in mid-2022, we will see secondary buyers be more conservative in their withholding analysis, as they anticipate transfers seeping into 2023. Time will tell how cooperative fund sponsors will be, however, and to date, the fund sponsors have not been very accommodating of requests for ECI-withholding certificates by selling LPs. We note that some larger LPs are having success negotiating side letter provisions pursuant to which sponsors agree to cooperate with respect to providing ECI withholding certificates, but challenges will remain for older funds and/or sales by smaller LPs who don’t have such side letter protections. It is very unclear whether underlying funds will be willing to issue such certificates as a general matter for classic secondary transfers. Some funds have started issuing such certificates to a few large investors, but historically, funds have not provided much assistance for secondaries and we will need to bit of a culture shift before the investors can rely on funds in this context. 

Note that another ongoing trend in the tax-withholding sphere is the market’s acceptance of the relevance of PN7 withholding in China. Whereas a few years ago we would see parties argue against the applicability of PN7 withholding, more recently, its applicability hasn’t been challenged, and assessing its applicability is now on the standard checklist of diligence questions for buyers of fund interests with Chinese exposure.

Isabel Dische: So, 2021 is now behind us and already in 2022, we’re seeing a high volume of new secondary processes kick off for portfolio sales, preferred equity deals and fund recapitalizations. Looking ahead, what do you predict for 2022?

Adam Dobson: Looking ahead, in the American market, I expect continued growth in deal volume as existing entrants look more creatively at the kinds of transactions and target industries which fit within their secondary mandates and new entrants bring large new pools of capital to the market. We’re also likely to see some evolution in market terms as these new entrants bring fresh perspectives to these transactions, for instance, with buyout managers pursuing more robust portfolio company diligence.

Vincent Ip: In the Asian market, I’d expect more activity in the fund restructuring space as compared to years past. Sponsors are still coping with the need to generate distributions for investors after the significant drop in PE deal exits in 2020, which resulted in the accumulation of assets—whether to facilitate new fundraising plans or to right-size a large portfolio. There were quite a few single asset deals in 2021 and we expect to see more this year. 

I expect we will see growing market comfort with GP-led transactions, which involve more closely-held portfolios managed by more local, and less-established managers.

We will likely also see greater acceptance of secondaries transactions in additional geographies. In Japan, for example, where the secondaries market is still small, regional banks have significant exposure to private equity investment on a primary basis and may be potentially looking for liquidity or portfolio rebalancing opportunities.

Speaker: Echoing much of what you’ve heard from Adam and Vince, in the European market, we expect to see continued and significant growth this year, both in terms of size and volume, as well as an expanding universe of participants.

Isabel Dische: Needless to say, there’s a lot to consider, but I think it’s fair to say we predict 2022 will be another very active year for secondary transactions, and that sponsors and secondary buyers will continue to find creative ways to create alpha through these deals. Thank you for joining all of us for today’s discussion.  For more information on the topics that we have discussed or other topics of interest to the asset management industry, please visit our website at And of course, we can help you navigate any of the topics that we have discussed today—please don't hesitate to get in touch. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including on AppleGoogle and Spotify. Thanks again for listening.

Subscribe to RopesTalk Podcast