On my travels around London this week I heard a fun secondaries market analogy.
It went something like this: mid-market firms are like gazelles, chasing proprietary bargain investment opportunities, while the large-cap secondaries fund managers are like elephants, ‘lumbering’ after long, drawn out multi-billion dollar auctions, spin-out and restructuring processes – and often paying premiums for the privilege.
You won’t be surprised to learn it was a mid-market fund manager sharing this with me.
While this person understandably believed wholeheartedly in their firm’s approach, it got me thinking about whether or not the analogy can really be universally applied across the marketplace – a lot of players, like Blackstone’s Strategic Partners for example, will comfortably do very small as well as very large transactions. And even if you could make the gazelle vs. elephants generalisations stick, does it matter?
And what of the image of the nimble gazelle, originating more proprietary deals at the lower end of the market and potentially producing higher returns than large-cap peers? It certainly sounds like a smart way to approach the (increasingly crowded) secondaries market, but that doesn’t necessarily mean it’s a ‘better’ strategy.
Last week, we pointed out that simply talking about whether there’s a discount or premium on a transaction fails to adequately capture why buyers have priced their bids a certain way, or the future upside they expect when funds mature and move into exit mode.
It’s hard to find evidence that the so-called elephants are making poor use of their time or capital spent on the large, complex transactions and auctions that have become more commonplace in recent years. For example, Coller Capital’s $5 billion Fund VI, closed in 2012 and more than two-thirds invested now, was producing a nearly 45 percent internal rate of return as of 31 March 2013, according to figures from the California State Teachers’ Retirement System. CalSTRS committed $100 million to that fund, which has backed spin-outs and purchased big portfolios, and is probably pretty pleased with the results.
Which brings up another point worth keeping in mind: institutional investors of a certain size (like CalSTRS) simply need to put large sums of capital to work to meet their portfolio objectives. So they’re almost always going to back the elephants.
With secondaries dealflow primed to hit new records this year, becoming increasingly varied and expected to keep growing by 10 percent, the good news is that it seems there’s plenty of room for players of all sizes and strategies. Whether or not they rate their rivals is another matter.