Another multibillion-dollar asset manager is bullish on the private equity secondary market.

Multifamily real estate investment manager Bridge Investment Group agreed to acquire the bulk of Newbury Partners, a $4.3 billion private equity secondaries firm, in a $320.1 million all-cash transaction. The acquisition would result in a combined organization with $48.5 billion in AUM and extend Bridge's reach into the secondary market.

"The secondaries business is one that offers significant growth potential going forward," Robert Morse, executive chairman of Bridge, said of the transaction during the firm's Tuesday morning earnings call.

Bridge primarily focuses on investments in multifamily real estate, debt, and workforce and affordable housing. But as last year's market headwinds pushed smaller managers to consolidate, the firm selected secondaries as the "most attractive" space for future growth, Morse added. The acquisition will also help grow Bridge's investor base, which is currently 56% individual investors and 44% institutional.

In 2021, the secondary market saw a record year, with over $130 billion in total transaction volume, according to an Evercore report. As investors grappled with geopolitical upheaval, mounting inflation and heightened interest rates in 2022, total secondary market transaction volume dropped to $103 billion. Still, 2022 was one of the market's most active years, topping the previous peak in 2019 by over $20 billion.

The two firms anticipate a booming secondary market in the year ahead, and they're not alone. In a survey of secondary buyers included in the Evercore report, 93% of respondents said they expect secondary transaction volume to exceed $100 billion and 40% said they anticipate volumes that surpass $150 billion by the end of 2023.

What's more, a Jeffries report published in January expects negative cash flow in LPs' PE programs and persistent over-allocation to PE to fuel a gradual rebound of the secondary market in 2023. As institutional investors find themselves over-allocated to the private markets and feel mounting pressure as capital calls outpace commitments, they'll seek liquidity in the secondary market to free up capital for new funds.

"We are the solution to the meta-problem that the fundraising environment is facing," Chris Jaroch, a partner at Newbury, said on the call.

For this reason, Newbury's leadership doesn't anticipate any hiccups in the launch of and fundraising for the firm's sixth fund, which is expected to launch in the first half of this year, once the previous fund closes. Newbury's fifth fund, Newbury Equity Partners V, which has a total of $2 billion in commitments and has invested in 43 secondary transactions, is 95% committed, Jaroch added.

Other multistrategy asset managers are showing signs of anticipating a secondaries boom. In January alone, Brookfield Asset Management reportedly entered talks to acquire the private equity secondaries business of Deutsche Bank's asset management arm, and Blackstone closed its Strategic Partners IX fund on $22.2 billion, making it the industry's largest single fund dedicated to the secondary market. Early this month, Morgan Stanley Investment Management raised $2.5 billion for its Ashbridge Transformational Secondaries Fund II, a fund focused exclusively on sponsor-led secondary deals for single assets.

The main challenge for secondary market participants is the pricing gap between sellers' offers and what buyers are willing to pay. There is a natural lag in the reporting of private equity asset valuations, typically about six months, which means that many market participants are anticipating valuations to reflect last year's decline in public equities. This has led to markdowns of private assets on the secondary market. Specifically, secondary pricing for LP portfolios declined 11 percentage points across all strategies in 2022, according to the Jefferies report. In short, secondary buyers aren't willing to pay top dollar for assets they think are going to depreciate in the coming months.

But other secondary market players expect this gap to close in 2023. Jeff Hammer and Paul Sanabria, global co-heads of secondaries at Manulife Investment Management, said that the valuation gap will shrink in 2023 as LPs experience continued need for liquidity. The Jefferies report also expects pricing to slowly recover.

Regardless of whether or not the pricing gap eases, Morse said continuing pressure on LPs to deploy capital and balance their portfolios will further the need for secondary vehicles. The acquisition is expected to close in the first half of this year.

Featured image by zhekoss/Shutterstock

This article originally appeared on PitchBook News