When buyers become sellers

Secondaries firms are increasingly divesting stakes they’ve picked up on the secondaries market. What gives?

Nearly three-quarters of the top 30 specialist secondaries buyers have also used the market to sell assets. That’s according to a report released last week by global advisory firm Campbell Lutyens, which also found a whopping 86 percent of those buyers-turned-sellers have disposed of assets they purchased specifically for their secondaries investment programmes.

This means the majority of the world’s biggest secondaries players are using the market as both buyers and sellers and, in the words of Campbell Lutyens, practising what they preach. On the one hand, this isn’t a new development, but the report suggests this is on the rise in today’s market environment.

I spoke to Thomas Liaudet, a partner in Campbell Lutyens’ London office, who sees four main drivers behind this.

One, pricing is high, which means sellers are looking to opportunistically sell stakes they would otherwise have held on to.

Two, as funds secondaries players have stakes in come to the ends of their lives, monetising these interests through secondaries sales and distributing the returns to LPs can be much more attractive than dividing up tail-end assets between limited partners when the fund faces liquidation.

Three, GPs are fighting against the clock to strike the right balance between realising a good cash-on-cash multiple, which affects carry, and the fund’s internal rate of return (IRR). In some cases it might make sense to sell interests because holding on to them might not generate a large increase in returns and will drag down the IRR.

And four, managers may want to shut down their old funds so their relationships with existing LPs are tidier. When they hit the fundraising trail, it’s sometimes easier for LPs to re-up if they haven’t got numerous investments with the same GP in multiple tail-end funds.

So is this a strategy that’s working for secondaries players? That depends on who you speak to.

Firms known to have sold recently include Pomona Capital and Strategic Partners. The rationale of course differs from deal to deal, with opportunistic pricing and clean up of tail-end funds driving at least two transactions involving these firms, I’m told.

A partner in charge of secondaries at a global investment firm told me he is open to the idea of selling from the funds he manages, although he hasn’t done so yet. “If there is a scenario where I can accelerate liquidity for my investors and get out at a price that is attractive, there’s no reason why I should not be looking into that,” he said.

Then there are firms who prefer not to sell, such as Ardian. Olivier Decannière, head of Ardian UK, told me last year his firm prefers to hold on to stakes it has picked up on the secondaries market.

“There might be a crisis tomorrow, but we are long-term investors,” he told me. “Of course we constantly review whether we should sell or not. But over the long term, as long as you are more comfortable keeping the asset and creating value for your investors, it’s often best to keep it. This is what we have done so far.”

The operative term in Decannière’s comments being “so far”, and this goes for other secondaries firms who have yet to sell from their secondaries pockets as well. At the end of the day, high pricing might just entice more secondaries firms to sell.

“Everyone’s a potential seller,” one industry participant told me. “It’s just a matter of price.”

When should secondaries buyers sell? Tell me at: adam.l@peimedia.com