It’s well documented in these pages that sponsors are using the secondaries market to hold onto their best assets for longer. Some have been skipping the secondaries part and doing it, in some shape or form, by themselves.
In October 2019, affiliate title Buyouts reported that TA Associates was raising up to $1 billion to take minority stakes in certain portfolio companies being sold by its flagship fund. This way it could create some liquidity for its flagship vehicle while remaining exposed to assets it believes have room to grow. In June, follow-up TA Select Opportunities II closed on its $1.5 billion hard-cap.
Another tech and growth-focused manager Insight Partners is targeting $1.25 billion for Insight Venture Partners X Follow-On Fund, which unlike TA Associates’ fund will make primary and secondaries investments in portfolio companies still held by 2017-vintage Insight Venture Partners X.
“Many Fund X investments are presenting attractive follow-on investment opportunities beyond Fund X’s capacity,” consultant Hamilton Lane noted in pension documents earlier this year.
These funds have much in common with secondaries funds that do GP-led deals. They allow GPs to remain exposed to top performing assets or provide extra capital for assets that could become outstanding with more time and money. They are also another source of fees.
LPs in double-down funds get access to high-quality assets with a clear track record and decent prospects, and they get to partner with a GP that knows the company well. Unlike investing in a secondaries fund, this often comes without the double layer of fees. TA’s Select Opportunities Funds do not charge a management fee but collect fees from portfolio companies, with carry of 20 percent.
So, how big a threat are these funds to the continuation fund market? For now, participants appear relatively sanguine. Groups such as TA and Insight have hundreds of investments, many of them minority stakes in young companies. GPs with smaller, more mature portfolios – which constitute a large majority of the market – might struggle to find $1 billion-plus of assets worth doubling down on.
There is also value in having an unbiased party that can price and select assets from a wide range of GPs, said Harold Hope, partner and global head of secondary investing within Goldman Sachs Asset Management.
“Longer term, there might be some people who just want to be with the Yankees and want to keep doing what the Yankees do,” he said. “But there will always be room for the All-Star team. Picking and choosing among the best sides is going to create an interesting portfolio that most GPs are not going to be able to recreate themselves from their own asset pool.”
The new innovation does serve as a reminder that the line between double-down funds, secondaries funds and co-investment funds is increasingly blurred. Secondaries buyers would do well to focus on the kind of complex, tailored GP-led deals that justify those fees.
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