Five takeaways from PEI’s secondaries roundtable

Wish you could have been a fly on the wall during a heavy-hitting roundtable discussion among secondaries market thought-leaders? Here’s your chance.

Parent company PEI recently gathered some of the secondaries market’s leading participants for a roundtable discussion in New York.

Executives from Debevoise & Plimpton, Greenhill Cogent, Ardian, HarbourVest and AlpInvest Partners talked for a couple of hours about the market for LP fund stakes and GP-led transactions, how secondaries buyers are using leverage, and whether activity is picking up in energy secondaries.

Here are five takeaways from the roundtable:

The LP fund stake market is pricey
The LP fund stake business has become so efficient in the last couple of years, with advisors running auctions which are won by the highest bidder, and as a result returns often suffering.

“That part of the market has been generally expensive,” said Wouter Moerel, a managing director with AlpInvest Partners. “There’s been a flight to quality and people are paying for that.”

To compete and keep returns up, buyers are using leverage, focusing on large portfolios and using a large database of information on funds and their underlying portfolio companies to be able to be fast movers.

Tail-end portfolios are on the rise
The sale of LP fund stakes has become such an efficient market, it has also allowed funds of funds and secondaries buyers to sell tail-end portfolios as a way to wind down older funds. Selling in the secondaries market can be beneficial for logistical as well as liquidity reasons.

“The market is getting to a point where we are likely to see a steady and constant need – for fund of funds managers generally speaking but for others as well – to sell tail-end portfolios as the amount of NAV in 10-plus year-old funds grows,” said Chris Bonfield, a managing director with Greenhill Cogent.

GP-led deals are about partnering for the long haul
With GP-led transactions and direct secondaries, which are quickly gaining steam and offer secondaries buyers the ability to secure higher returns, the goal is not only to acquire a fund stake and become a new LP. It is also about becoming a long-term partner to the GP and having the possibility to provide primary capital down the road.

“What’s critical to us is ensuring there’s proper economic alignment. Specifically, there needs to be a shared view of success between the manager and the investors,” said Jeff Keay, a managing director with HarbourVest. “Our ability to be a good partner both in executing the secondaries transaction but also in supporting team over the longer term are some of the factors that can differentiate us as a counterparty beyond price. We love that part of the market and we think there are a lot of inefficiencies in terms of deal dynamics that play in our favour.”

The status quo option can be tricky
GP-led restructurings have previously been somewhat frowned upon by LPs, as they presented limited options: either selling their interest or accepting new economic terms. This has changed, with LPs now having the ability to keep initial conditions. However, while it’s a welcome development for LPs to have a status quo option, it’s trickier from a legal standpoint to define how that will work in practice.

“If you’re taking some assets and moving them into a new fund, how do you actually replicate the existing terms?” Kate Ashton, a partner with Debevoise asked. “That’s one of the reasons these transactions are very interesting. A lot depends on where the manager is in the carry and reaching that hurdle and how you’re going to put that in the new vehicle.”

LPs are feeling the pain in energy
With the downturn in the energy sector, some limited partners, worried the pain will be long term, are moving to exit poor performing funds.

“You would think people would hold their portfolios right now, but in fact you’re seeing quite a lot of paper on the market,” said Ardian’s Vladimir Colas, who added there is still a bid/ask spread that means most of these transactions are still in the “ongoing discussion” phase.

You can find the full article, How GP-led deals are driving secondaries, in the May issue of sister publication Private Equity International. We will publish excerpts on Secondaries Investor in the next few weeks.