Notes from New York

Secondaries Investor has been in the Big Apple talking to market participants. Here’s how things look from North America.

Secondaries Investor has been in the Big Apple this week talking to market participants. Here’s how things look from North America.

1 LP side letters are eating away at secondaries funds’ dealflow
Limited partners are increasingly giving their secondaries managers side letters – customised agreements altering the terms of governing documents – which can include lists of funds they’d like to buy into and asking managers to show them deals that arise. As recently as five years ago, secondaries firms and funds of funds were only competing with other dedicated buyers, but now LPs are making the landscape more competitive.

“Everyone wants to do secondaries now,” a managing director at one investment firm told me. “Every fund of funds, every insurance company, every pension fund, every family office has a side letter saying they want to see secondaries, as well as co-investments.”

2 Greater diversification in portfolios is pushing pricing higher
In recent years, most portfolios holding between 10 and 20 funds would be broken up among as many as five buyers. In the last 12 to 18 months, the same portfolios have been bought by a single buyer who is willing to pay more for greater diversity and lower risk, according to Phil Tsai, global head of secondaries advisory at UBS.

Greater diversification also means it’s easier for potential buyers to use acquisition financing, Tsai said. This is driving higher pricing.

3 The advisory space is becoming more crowded
Advisors in the larger end of the market have been busy grabbing and defending market share, and the lower end, which traditionally had lower barriers to entry, is becoming more sophisticated. New entrants to this space have to bring a different level of expertise to the table, Shawn Schestag, who leads advisory firm and placement agent Sixpoint Partners’ secondaries business, told me.

4 The line between buyers and sellers is blurring
As we recently detailed, secondaries players were traditionally sellers or buyers, but that’s changing. Most of the active dedicated secondaries buyers have sold interests in the market over the last few years, including big name traditional buyers such as Blackstone’s Strategic Partners as well as firms like Ardian, which has previously signalled it prefers to hold stakes to maximise value.

5 Now is a tough time to do deals
“For any professional investor, this is a more difficult moment than any we’ve experienced,” Joe Baratta, global head of private equity at Blackstone, said at an industry conference I attended on Tuesday. Secondaries investors I spoke to echoed these sentiments, adding high valuations, abundant dry powder and sellers wanting lower paper discounts made deals tougher to do.

Sources also said cheap leverage amid record low interest rates was making it challenging for buyers such as sovereign wealth funds or pensions, which may not be able to use financing, to remain competitive.

So how are buyers getting their deals done?

“You really need to be on top of situations, react quickly, know the assets and GPs well, have existing access and information, know how to use structuring and be creative and have experience closing deals,” one of the sources said.

What trends or types of deals are you seeing in North America that are yet to hit the European and Asian markets? Let me know: