Secondaries and Fund of Funds insight

Our insight events bring together industry leaders and advisers and provide guests with updates on industry trends and issues. 

Secondaries and fund of funds seminar 2017

This year, the focus was on generating returns in the secondary market, and the importance of innovation within the sector.
Simon Hamilton, global head of Fund Finance at Investec, gave an overview of the findings from our pre-event survey. He highlighted that overall the results indicated that pricing was increasing while returns expectations were decreasing in this sector. 
 

Marc Kahn, our global head of human resources and organisation development (pictured right) talked about the importance of innovation in the workplace – focussing on the unique dynamic between behavioural science and risk. Our first panel discussed generating returns in the secondary market, and the second panel covered off innovation within secondaries.

In London, Brenlen Jinkens, managing director of Greenhill & Co, gave a market snapshot before stepping over to moderate the first panel.

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Download Brenlen Jinkens' slides here >

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The secondaries private equity market has grown exponentially over the past ten years, but what does this increasing competition mean for existing players?

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The importance of innovation in the secondaries market

‘Finding ways in which to structure deals and ensuring they drive value, and the right risk-reward balance for the buyer, is important’

Matt Hansford, Fund Finance, Investec

  • Read the transcript

    Brenlen Jinkens, Managing Director, Greenhill & Co: “Innovation is important for the secondaries and Fund of Funds market because it helps us get deals done. If I look back at how we were doing deals ten years ago, they took longer, they were more expensive, they were altogether more cumbersome, and some of the innovations that we’ve seen since that time allow us to do deals more quickly, more cheaply, more effectively for all the parties that are involved.”

    Matt Hansford, Investec Fund Finance: “The breadth of the market now is such that buyers are looking at more different deal types, they’re looking at different sectors, geographies, asset classes, more concentrated and complex deals and so I think within that, finding ways in which to structure these deals and ensuring they drive value and drive the right risk-reward balance for the buyer is important.”

    Nicolas Lanel, Managing Director & European Head of Private Capital Advisory, Evercore: “There is always room for more innovation as competition grows. Competition is the engineer and it goes in leaps and bounds, but it’s not a regular process. We are seeing today all participants in this market are trying to fine tune their model, and we are seeing slight twists being applied to the way these are being done today - this is a never-ending process and there is certainly room for more innovation
    always.”

    Gregg Kantor, Investec Fund Finance: “Do I think there will be more innovation in this market over the coming years? Absolutely. I think if we look at where this market is versus other more mature markets such as the equities space there is plenty that’s done that’s not being done in our market. Even over the last year or so we’ve seen a massive amount of new products being developed and run and growing into them, such as preferred equity and dividend recaps of funds.” 

Reviewing leverage in the secondaries market

‘Over-leverage on concentrated portfolios where the risk is too high is not appropriate. But leverage on portfolios where the risk is lower is highly appropriate.’

Simon Hamilton, Global Head of Fund Finance, Investec

‘Over-leverage on concentrated portfolios where the risk is too high is not appropriate. But leverage on portfolios where the risk is lower is highly appropriate.’

Simon Hamilton, Global Head of Fund Finance, Investec

  • Read the transcript

    Simon Hamilton, Global Head of Fund Finance, Investec: “I think leverage serves a critical purpose. I think the industry has sold itself to investors around a certain return level and that return level is a static return level. The challenge is on the supply side of it. The types of deals that come along are vastly different: from hugely diversified portfolios to very concentrated portfolios; offers a different risk and reward. I think what leverage does is allow you to adjust that risk and reward. It allows you to have the same outputs, the same level of return that you give to investors that allows you to adjust the input side.”

    Oliver Bartholomew, Investec Fund Finance: “Leverage is being used more and more. The transactions within the industry are becoming more and more complex. Now what leverage does: leverage provides the opportunity to financiers, to provide solutions to portfolio sellers in a very efficient manner, it allows speed of execution and it allows more efficient operations in the market. So I think as lenders and borrowers work together more and we see more of this debt in the industry, I believe leverage will grow and become more common within the market.”

    Nicolas Lanel, Managing Director & European Head of Private Capital Advisory, Evercore: “We as an advisor into this market see it as a relatively healthy tool that, if used wisely, will play its role and will have its place in this market, completely.” 

    Matt Hansford, Investec Fund Finance: “It’s fair to say that leverage isn’t appropriate for every transaction. We look at lots of transactions that might be quite concentrated, that could be quite complex and whilst we can often put structuring into some of those transactions using different tools and different experience that we’ve had over quite a number of transactions, there are transactions we look at that we’re not comfortable putting leverage on.

    “Equally there are transactions that the buyers look at – that they think actually they are getting the right risk reward balance, they don’t need leverage and they don’t want to add complexity or risk. But I think overall leverage is a tool in terms of doing deals, in terms of completing transactions, in terms of making them more efficient – is valuable. It can unlock deals that weren’t otherwise possible; it can make good deals, great deals. So it’s an important part of the toolset
    for secondaries these days."

    Gregg Kantor, Investec Fund Finance: “I think that whether it be fund level solutions or SPV (special-purpose vehicle) level solutions, leverage will stick around and will continue to innovate to change how it’s used and ensure that the best risk profile is being achieved.”

    Simon Hamilton, Global Head of Fund Finance, Investec: “Leverage is not relevant in every circumstance. Over-leverage on concentrated portfolios where the risk is too high is not appropriate. But leverage on portfolios where the risk is lower is highly appropriate.”

How is the secondaries market evolving?

‘We’re seeing the market go towards more bespoke, specialist, financing solutions. The deals may be smaller but they’re much more complex, and you need to partner with someone that has a long-term understanding of fund structures.’

Jonathan Harvey, Fund Finance, Investec

  • Read the transcript

    Ian Wiese, Investec Fund Finance: “When you think about Fund of Funds or in fact anything, innovation and evolution is part of it and I think that as the market has migrated, things have changed, risk profiles have changed. The way secondary managers have applied investment strategies and looking at pricing these days, financing and innovation has become intrinsic to that. So I think it’s more an evolution than a revolution, which is quite exciting.” 

    Jonathan Harvey, Investec Fund Finance: “In terms of our view on leverage on secondaries transactions, if you look at where we’ve come on our journey of providing finance to that market, the first transaction we did was in 2012, at a very low LTV (loan to value) of around 20%. When we first look at this from a lending perspective we viewed this deal to be very diverse. It was something like five fund of funds, with five hundred underlying assets. And for a new lending concept – from a credit point of view – the diversity was something which was attractive in terms of a future cash flow."

    “If we look at where the market has gone from then to now, that transaction would almost be on the specialist side. In terms of the diversity we look at now, you’re now looking at fifty fund of funds and five thousand underlying companies. So where we’ve seen the market evolved to on the bigger transactions, is a much more commoditised, lending offering based around diversity." 

    “Where we’re seeing the market go now – as the volume of these deals is somewhat drying up – is towards more bespoke, specialist, financing solutions. The deals may be smaller but they’re much more complex, and therefore you need to partner with someone that has a very good, long-term understanding of fund structures.”

    Simon Hamilton, Global Head of Fund Finance, Investec: “I think that there is a myth in secondaries leverage that there is only one solution – there’s actually a lot more, and it ranges from capital call facilities to asset-backed facilities to dividend recaps all the way through to now hybrid solutions, which to me, is really where the market is starting to evolve itself."

    “So I look at the acceptance level and where we’ve moved over the last five-ten years, and it’s gone a huge way. It was a point where no one wanted to use it or accepted it, to the level now saying we want to use it. And the different products, people have different levels of acceptance."

    “Our research said that 76% of funds now use capital call facilities. And in 2017, people expect over 65% of the facilities to be hybrids. So I see each product innovating in itself in a different way, each having a different level of acceptance and more specifically, people really, really understanding where they’re being used and why they’re being used, and that allows us, as people who provide those facilities, to give a much better solution to our clients.”

The role of debt in the secondaries market

‘As the market develops and matures as it’s done over the last ten years, innovation will continue, not necessarily through new products, but products from alternative sectors being brought into play into the secondary market’

Slade Spalding, Fund Finance, Investec

‘As the market develops and matures as it’s done over the last ten years, innovation will continue, not necessarily through new products, but products from alternative sectors being brought into play into the secondary market’

Slade Spalding, Fund Finance, Investec

Download last year’s event report

Debt and the secondaries market - how relationships have become more important than pricing