This week we reported on the breakdown of the launch of Stone Point Capital‘s entry into the secondaries market, led by industry veteran Jonathan Costello, after less than a year.
We had been hearing rumblings over the last few weeks that something was afoot. At the heart of the matter, sources told us, were disagreements over the nature and structure of the platform Costello was to launch. We should point out that it remains unclear what the outcome of this development is and whether Stone Point still plans to be involved in the secondaries market in some way.
What is clear is that Costello is likely to remain a formidable figure in the secondaries market when he resurfaces. A respected professional with both advisory and buyside experience, Costello ran Morgan Stanley Alternative Investment Partners’ private equity secondaries business. As PJT Park Hill’s global head of secondaries, he oversaw impressive growth: during his four-year tenure, the firm’s annual deal volume grew roughly three-fold to $14.5 billion, according to our calculations based on successive Secondaries Investor Advisory Surveys.
Speaking to us for sister title Private Equity International‘s upcoming GP-led Special Report, Costello said he estimates the total addressable market for single-asset and highly concentrated secondaries to be $50 billion a year in the US alone. To put that into context, it is a roughly five-fold jump on last year’s total.
“All the ingredients are there for hyper growth over the next five years,” Costello said. He added that the number of fund-to-fund transactions as a percentage of overall private equity deal volume was growing every year, and that such deals are good candidates for single-asset secondaries transactions. In some cases, an asset is so successful it simply cannot be moved between existing funds; in others, the equity cheque required to move the asset is too large for the new vehicle to write on its own.
Market sources identify three major risks to the GP-led secondaries market: 1) GPs attempting to launch processes involving too many different assets, especially where those assets are of differing quality; 2) not giving LPs a status quo option – something the Institutional Limited Partners Association has highlighted in its inaugural guidance on GP-leds – which can rub LPs the wrong way; and 3) running secondaries processes on younger portfolios and creating concern among LPs over the performance of the remaining assets.
At a time when the battle for talent in the GP-led market is at an all-time high – something PEI will be exploring next month in its GP-led Special – experienced professionals with expertise in navigating these potential minefields are few and far between. It’s likely we haven’t heard the last on Costello’s venture.
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