In the last couple of months, the secondaries market has had a marked change in direction. Gone are the days of secondaries general partners (GPs) spending most of their time analysing diversified limited partner (LP) positions. Stats, spectacles and Monte Carlo simulations have been replaced with polo shirts, bottom-up analysis and higher stakes. Today the name of the game is GP-led solutions.
Much has been written on this topic. Even more has been said on podcasts (including by us).
Proponents are beating the drum that these deals are a 'no-brainer', which has resulted in secondaries GPs repositioning themselves to cater for this growing trend.
Managers have shifted direction to make single asset GP-led transactions a core focus area. Some have even begun raising funds with the sole objective of single-asset deals (search 'single asset funds GP-led secondaries' in your favourite search engine and enjoy the read). There has also been a plethora of secondaries advisors moving to investment banks in 2020-2021. Highly-rated secondaries leads have embraced new challenges at different funds as part of developing this new market. It is truly 'game on' across all areas in the ecosystem. It is time to get rid of your Rolodex and embark on digital tracking.
But let’s not forget – it takes two (or more) to tango. Primary GPs ultimately decide whether a continuation vehicle is the preferred liquidity route. That decision is undoubtedly influenced by the economics, despite reassuring opinions. The argument to investors leads with the well-known narrative: “We’re giving LPs optionality to benefit from the upside of a poster child asset that just needs a bit more time – and who best to realise this value other than the incumbent GP (given our knowledge and experience)?”
Let’s not forget the advisors who have been busy dusk to dawn pitching and structuring these deals. Fees on GP-led transactions are generally more attractive than on LP portfolio mandates.
This has resulted in less time spent on portfolio deals (consequently, the quality of information may be diminished) as the cost-benefit cannot be justified compared to GP-led mandates.
We have also been exceptionally active in these transactions – providing a variety of funding solutions as managers try to optimise the use of LP equity. The quality of assets that we have screened have generally been top-notch.
GP alignment is encouraging in comparison to other deals, and the use of leverage has generally been disciplined.
What could go wrong, you may ask? Hopefully, not much.
But let's not forget:
Single-asset deals present a different type of risk compared to what investors in secondaries funds have been used to: the investment outcome is binary. Hence, the returns on these funds/deals should be different compared to diversified plays.
Historically, secondaries managers have been generalists given the diverse nature of their investments and the focus on making returns by buying at a discount and mitigating the J-curve for investors. To excel in concentrated positions, sector expertise becomes much more important and is a different ball game altogether.
The market will continue to grow and we will be there to support these transactions – albeit going into each transaction with eyes wide open.
If a transaction stacks up, we believe there is significant upside for all participants (GP, secondaries fund, advisors, banks and ultimate investors). GP-led liquidity is becoming an essential primary source of liquidity (not just an afterthought). But, let’s not be fooled. Discipline is key; whoever blinks first may be the one that will have to do a lot of explaining if things turn out differently than expected.
Game on. Let the most disciplined participant win.