Deal volume hits $100bn

When secondaries buyers from the UK and Europe gathered in London last month for a dinner organised by advisory firm Setter Capital and Willowridge spin-out Kline Hill Partners, three things were on the menu: steak, Samuel Adams beer and provocative conversation about the secondaries market.

Attendees at the dinner, which was held in support of charity Canadian Food for Children, were asked to throw out bold, provocative statements on the secondaries industry. They were designed as conversation starters, but I thought I’d take a few ‘out to the market’ and share what my sources had to say.

The secondaries market will grow to $100 billion in annual deal volume in the next decade

This would represent a more than doubling of the $42 billion peak recorded in 2014, which isn’t really feasible, according to one source I spoke to. He points to the churn rate – the proportion of any given fund vintage that has been sold on the secondaries market – and this would have to grow to over 20 percent to reach $100 billion in annual deal volume.

Of course, churn rates could stay the same and the size of the primary market could double. Is that possible? “Anything’s possible,” said one source.

The largest players will go public

There are already large listed firms with secondaries operations such as Partners Group, Blackstone and Carlyle, but pure secondaries firms might face some tough challenges if they want to IPO as they lack enough diversification for the markets, one source told me.

Will we see the likes of Ardian, which invests across a pretty wide range of asset classes and strategies, listing on the New York or London bourses? It’s quite conceivable.

“Like in private equity, at some point the founders will want to get liquidity for their stakes,” the managing director at an advisory firm told me. Secondaries firms have grown a lot and it’s nearly impossible for other partners in the firm to buy out the founder, so going public is one way of getting liquidity, as the likes of KKR and Apollo have done.

A quarter of secondaries firms will raise smaller successor funds and slowly disappear

With record levels of dry powder and the mega-firms raising ever larger funds, the secondaries sector is becoming increasingly competitive, and firms eventually winding down ­­– or even becoming one of the ‘zombies’ many secondaries buyers see as a restructuring opportunity – is possible, sources told me.

But, right now, the opposite is happening. At least three niche firms have emerged in the last year including Whitehorse Liquidity Partners, which is focusing on credit, similar to London firm 17 Capital’s approach, as well as Kline Hill, which Mike Bego set up to focus on the smaller end of the market. Secondaries firms aren’t disappearing, they’re appearing, and with Kline Hill more than half of the way to the $120 million target for its debut fund after less than half a year, it would seem the overall market hasn’t reached a peak quite yet.

Most limited partners will master the art of secondaries investing

Secondaries are complex and experience is needed to run due diligence processes on deals. If LPs are going to participate as buyers on their own in the market then, they need to build in-house expertise.

In some cases this is already happening. Canada Pension Plan Investment Board recently hired former Pantheon partner Nik Morandi to head its European secondaries and co-investments team in London, and Singapore’s sovereign wealth fund GIC last year appointed Jeremy Weisberg, also a Pantheon alumnus, to focus on secondaries from New York. Of course, GIC and CPPIB are not ‘your typical’ LP; they are both giant investors with a documented desire to do more direct investing.

What are your provocative views on the secondaries market? Email me at adam.l@peimedia.com

PS: Next month we are hosting our third-annual, invite-only Secondaries Retreat in Southern California for institutional investors and secondaries fund managers. Click here to request your invitation and more information.