The ‘fantastic economics’ of secondaries advisory

Six specialists discuss the popularity of secondaries advisory, which is making the space more competitive.

In an excerpt from ‘Getting Complicated’, a secondaries feature in this month’s issue of Private Equity International, six secondaries specialists talk to PEI’s Graham Winfrey about the “fantastic economics” of secondaries advisory and its resultant popularity, which is making the space more competitive.
Capital Dynamics managing director Joseph Marks, Cogent Partners managing director Todd Miller, Landmark Partners head of secondaries Robert Shanfield, Park Hill Group managing director Adrian Millan, Proskauer partner David Tegeler and W Capital founding partner David Wachter trade opinions.

PEI: Did any of the big people moves in the advisory community last year have an impact on the market?

Adrian Millan: Despite the moves that took place, we did not see an impact on market volumes. There will always be new and changing players in any growing marketplace.

Robert Shanfield: The other thing we’ve seen happen in the advisory market is the growth of this sort of buy-side engagement. The matching of individual interests buyers have in a specific LP interest with a corresponding interest of an existing LP to sell.

It’s not clear to us how much this activity is taking away from transactions that would otherwise have been intermediated in sell-side engagements, or whether it is adding or detracting from overall pricing efficiency in the market. I think there are arguments on both sides. But there’s no question the economics are better for the advisors.

Todd Miller: The economics are fantastic. Actually better than our market. There are people popping up everywhere trying to do this. I don’t think it had any impact on the market last year.

Just three years ago the advisor space was a duopoly. Every pension fund we went to said we’re only interested in talking to two advisors. Now it’s not uncommon for us to show up and someone says, “I’ve been interviewing five or six advisors.” And that’s just in the US.

David Wachter: To me it’s a just a general recognition that the breadth of the secondary market is getting much more significant, and the industry is justifying more advisors than it has in the past. In the plain vanilla LP interest transactions, from what I understand, the fees are getting compressed, leading advisors to look to pursue advisory work in the more difficult and creative parts of the market, such as fund recaps.

The other interesting thing is that no large investment bank has moved in to be a major player in this market. In fact, it’s gone the other way, where guys have left bigger firms to start small, more specialised boutique shops. This may be because the overall fee base of the industry is not material for a big firm.


PEI: Where is the best value to be found? And to what extent are investors branching out into other types of private market secondaries, particularly via separate accounts with blended strategies?

Adrian Millan: The best opportunities are where access is limited, underwriting is difficult, structuring is possible or specific expertise is required.

Given these dynamics, there has been a meaningful uptick in GP recapitalisations as well as interest in real estate, energy, credit and infrastructure secondaries.

Joseph Marks: I think if you’re putting money in secondaries in the next three years you need to have a longer view and not look at only this quarter and the last quarter. Personally, I think there will be just as good a chance at buying at better entry values today than the other way around.

Robert Shandwick: We’ve been doing real estate secondaries for 20 years. It’s a market that in a lot of respects parallels private equity, albeit with a timing lag. And it’s a really interesting place to be.

We all look back at the old days of private equity secondaries, when there were fewer competitors and better economics at the individual transaction level. However, there was much less going on and the market needed a lot of education. I think where real estate is right now is somewhere in the midst of a similar evolution.

David Tegeler: We’ve been anticipating an increase in secondaries activity in Asia. As a result, we’ve recently hired attorneys in our Beijing and Hong Kong offices with experience in both private investment funds and secondary transactions.

With respect to private equity real estate secondaries, that does feel like something that’s been delayed. The volume appears to be increasing, however, and it could have a big impact in the secondaries market going forward.

Reporting by Graham Winfrey