Secondaries firms are increasingly separating their investment strategies into dedicated specialist funds amid a shift in dynamics in the market for second-hand fund stakes and assets.
Firms including Blackstone Strategic Partners, Coller Capital, AlpInvest Partners and LGT Capital Partners have all carved out separate strategies from their main funds and have launched dedicated vehicles over the past year.
Regulatory filings show that Coller registered a vehicle named Coller LP Secondaries in December, while affiliate title Secondaries Investor understands that a large US-headquartered investment firm has also launched a dedicated GP-led fund alongside its flagship offering.
“Like many other markets where there’s increased competition, specialisation is a way to diversify and distinguish yourself and increase market share,” says Amanda Butler-Jones, a partner at Akin Gump Strauss Hauer & Feld.
Underwriting LP portfolios and GP-led processes requires different skill sets, she adds.
“On the LP side it’s about diversification, which is very different from the GP-led model in terms of being focused on one or more assets.” For certain buyers, separating LP and GP-led strategies may be a way to distinguish and market themselves – something that is particularly important in a buyer’s market, Butler-Jones says.
The secondaries market is ripe for disaggregation, according to Yann Robard, founder and managing partner at Whitehorse Liquidity Partners.
“You’ve got preferred [equity], you’ve got diversified LP, then leveraged diversified LP, then multi-fund continuation funds, then single-asset continuation funds,” says Robard. “What you have is a risk-return spectrum that’s starting to get created in the secondary market and that’s just a natural evolution of the maturity of this industry.”
According to Sabina Sammartino, a partner at placement agent Mercury Capital Advisors and head of the firm’s secondaries advisory team, vehicles dedicated to particular strategies are a product of the growing sophistication and size of the market as opportunity types continue to expand.
“Like many other markets where there’s increased competition, specialisation is a way to diversify and distinguish yourself and increase market share”
Akin Gump Strauss Hauer & Feld
Different investment profiles and target returns across asset classes and transaction type may also provide the rationale to set up dedicated vehicles, Sammartino adds.
In January, Strategic Partners said it had raised $25 billion for its latest secondaries programme, including $2.7 billion for its debut standalone GP-led secondaries fund. The vehicle, which represents the first time the Blackstone unit has split out its GP-led strategy from its flagship private equity offering, will mainly focus on single-asset processes, as previously reported by Secondaries Investor.
Carlyle Group’s AlpInvest is seeking $500 million for AlpInvest Atom Fund, its inaugural single-asset continuation fund-focused vehicle, Secondaries Investor reported in December, while LGT’s most recent secondaries fundraise in 2021 – a $6 billion haul – comprised separate pots of capital for LP stakes and single and concentrated deals.
ICG is one firm that differentiated its GP-led strategy from the outset. The London-listed manager started off with a GP-led strategy – now called its Strategic Equity team – and has since launched a separate LP portfolio-focused team with the hire of professionals from Pomona Capital and Unigestion in 2019, respectively. The two groups operate separately, Secondaries Investor understands.
“Competitive pressure is one of the major drivers of specialisation,” says Jeff Hammer, global co-head of secondaries at Manulife Investment Management. “The greater number of participants in a given market, the greater the need for differentiation. Sources of differentiation include improved, sharper, deeper skill sets as well as broader, diversified, refined knowledge.”
LPs are beginning to differentiate pureplay GP-led secondaries funds from traditional LP secondaries funds and hybrid secondaries funds, Hammer adds. This is driven in part by different return expectations for different strategies: a typical pureplay GP-led buyer will only underwrite for a 2x minimum return and a four-to-five-year holding period without the use of leverage. A traditional LP portfolio buyer aims for a 1.5x to 1.7x return over a longer time period, typically with leverage. A hybrid fund that bids on both types of deals will target returns somewhere in between.
Separating fund strategies makes comparing funds – both their risks and their returns – more meaningful, according to Robard.
“Given the different risk profiles, if you benchmark all secondaries the same way, despite the fact they have different strategies, then you’re benchmarking apples to oranges and you’re not really disaggregating what’s the strategy, and what the alpha being created by the GP is,” he says. “It would be like comparing VC to mezzanine funds.”
When it comes to single-asset deals – a strategy that accounted for roughly half of the $52 billion in GP-led volume last year, according to Jefferies data – concentration limits that restrict a fund from having too much exposure to a given asset mean some secondaries funds are capped at how much they can invest in such processes. These caps could typically be between 5 and 10 percent of a fund’s total exposure.
Having a vehicle dedicated to GP-led deals or single assets, for example, can allow greater investing firepower where a main flagship fund may have concentration limits for particular transaction types.
“If you benchmark all secondaries the same way, despite the fact they have different strategies, then you’re benchmarking apples to oranges”
Whitehorse Liquidity Partners
“In some cases investors are already in the flagship fund, but they might want to increase their exposure to the GP-led strategy because they want to benefit from increasing returns,” says Sammartino.
Concentration limits are not a driver of fund segregation in all cases, according to Butler-Jones. Fund managers can negotiate single-asset limits in the limited partnership agreements of their funds when outlining their strategy to potential investors.
“Concentration limits are negotiable like any other term in the LPA,” she says. Limits on exposure to single companies “would be a consideration in how to build those around in a way that works for single-asset deals – capping them or otherwise – or bucketing them from other types of deals”.
Ultimately, greater segregation of fund offerings means more options for LPs, according to Robard.
“There is a disaggregation of this market that’s happening right now and, over time, you’re going to see that you’re going to benchmark secondaries in different ways,” he says. “As an LP, you have to [think about] what’s good for my portfolio, what am I looking for, what’s the risk/return I’m looking for, and then self-select. Strategies are not necessarily better or worse off, just different.”