With the slowdown of M&A activity and the IPO market grinding to a halt, GPs and LPs are increasingly looking to the secondaries market for liquidity.

One of the portfolio management tools they use with growing frequency is the so-called continuation fund, which allows private equity sponsors to hold onto their portfolio companies for an extended period—oftentimes by bringing in new investors including secondaries funds, family offices, pension plans and sovereign wealth managers.

Such GP-led secondary transactions have risen in popularity in recent months. Not only have investors pumped more capital into these funds than they expected, but they are also looking to increase bets for the rest of the year, according to a newly released survey of 64 secondaries investors by fund advisory firm Eaton Partners.

More than half of respondents—55%—said that in the first half of 2022 they put more than $100 million to work in GP-led secondaries, which are primarily single- and multi-asset continuation funds, and 11% have invested in excess of $500 million.

That stands in sharp contrast with investors' expectations earlier this year.

In April, only 36% of investors surveyed by the firm planned to invest over $100 million in such deals over that period, including only 7% that expected to invest over $500 million.

Looking into the rest of this year, 62% of investors expect to raise their bet on GP-led secondary deals in H2.

The increase is due to a growing demand for alternative liquidity sources as the traditional exit routes—M&A and the public markets—become harder to access, according to dealmakers advising on transactions in the secondaries market.

"The higher percentage is due to more compelling continuation vehicles coming to market than anticipated, which has captured the attention and investment capital of secondary buyers," said Peter Martenson, global head of GP advisory, secondaries and direct investments at Eaton Partners. "And this may be due to the fall-off in the M&A market that has occurred with the falling public equities market."

Sponsor-led continuation funds allow GPs to recapitalize their portfolio companies from an older vehicle and provide liquidity to both fund managers and their LPs. Some LPs also asked their GPs to set up a continuation fund to free up capital.

"It seems that more of the focus these days is portfolio management by both GPs and LPs to deal with the downdraft in the public markets," Martenson said. "That's where we're seeing more of a story."

Other types of secondary transactions, including tender offers and strip sales, are also growing, according to Andy Nick, a managing director at Jefferies' private capital advisory arm.

At the same time, more LPs who have never tapped the secondaries market are pursuing sales of their LP interests this year, he said.

"We have seen more sellers contemplate secondary sales of LP interests for liquidity management purposes in 2022," Nick said. "These liquidity-driven sellers are seeking to generate cash to ensure they can comfortably meet future capital calls in light of a slowing distribution environment."

Related read: Q&A: Jefferies veteran dealmaker examines PE secondary market trends

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This article originally appeared on PitchBook News