Institutional innovation

Tullet Prebon’s global head of alternative investments Neil Campbell sees the growth of in-house secondaries at institutional investors as a means to avoiding fees through the traditional advisor-led process.

As an intermediary, we see ourselves as part of a market that’s developing, that’s becoming a lot more transactional. The secondaries market has to date been very opaque, based around a joint advisory and transactional model, but as the secondaries market matures it is becoming more efficient.

Investors become more empowered with greater knowledge of the market, so we see the future as one where brokers such as Tullett will facilitate informed investors to transact rather than advising and transacting for them.

The fund of funds model is expensive. Investors have seen that this is the case, and they have started to develop the capabilities themselves. Private equity has long liquidity terms and institutional investors are looking at their own costs and returns and asking serious questions as to whether they can invest directly themselves. Direct investments are therefore becoming popular.

You can see the distinction most clearly in real estate secondaries funds. If you’re an insurance company, why wouldn’t you go and buy a building yourself?

There are a lot of investors within direct secondaries looking at non-performing loans. A lot of private equity advisors are looking to buy those portfolios from asset advisers. Banks with a lot of NPLs are a great source for the secondaries market.

A big current driver at the minute is the high pricing of assets which is attracting new entrants to the sell side. Secondaries investors may not get the returns that they have got used to in the last couple of years: secondaries firms that look to produce an IRR return of 15 percent will struggle when they are charging fees of 1.0 percent and 10 percent in performance and higher prices means they may find it harder to produce target returns.

With many prime fund names trading towards par and sometimes higher in the market, some buyers are being forced to employ leverage which could be a high-octane strategy.