Meketa: The rise of real assets secondaries

Consulting and private markets advisory firm Meketa Investment Group expects to be active in private equity secondaries deals in the coming months and is eyeing real assets secondaries, according to principal Kunal Shah.

Where does Meketa’s secondaries practice fall in the market?

We started looking at the secondaries market in 2009, although we have been less active in the past two years because we were priced out. We expect to be more active this year though.

In the near-term, we will likely bid on a couple of opportunities that range from a portfolio of mature funds to GP restructuring. Most of our secondary activity has been in North America, because it is the region we know best.

In the long-term, we expect two thirds of the deals we work on to be in North America and one third to be outside of the continent.

How would you characterise the secondaries opportunities in emerging markets like Asia?

Asia is still a developing secondary market.  There is a wide range of quality among fund managers and assets. The good quality managers trade well and lesser known names are difficult to sell because they are not as well known.

The buyer universe is dominated by traditional secondary managers, who may not have deep coverage of the region.  These groups are spending more time and resources building their research. It’s fair to say that any such research build-out is in its early stages and the overall secondaries market is very young.

Outside of private equity, real estate is the only other asset class that is sizeable in the region. There aren’t many real assets opportunities as state-owned companies control most of the operations that aren’t available for private investment.

What type of secondaries activities do you see among natural resources funds?

Secondary market activity is correlated with the primary fundraising market. In the past few years, global natural resources funds have gained popularity and raised a lot of capital.  Therefore, we have seen an increase in secondary deal flow activity from natural resources funds, especially funds that are focused on the oil and gas sector.

We haven’t seen a lot of natural resources secondaries thrive in other geographies besides North America. However, many private equity funds in emerging markets, such as Latin America and Africa, have invested in natural resources sectors, giving exposure to non-US natural resources sectors.

Although there is one caveat, few GPs have raised funds dedicated to the sector, but private equity funds can provide such exposure.  Many private equity funds in emerging markets, such as Latin America and Africa, have invested in natural resources sectors as their economies are rich in such sectors.

Do you expect natural resources to continue to be a focus for secondaries investors?

Possibly in the next five years, there could be an increase in secondaries opportunities because some of the recent investments were done at a high valuation, so when the market corrects itself, those stakes will sell. For example, we may see some metals and mining sales because of lower valuations today.

The demand across emerging markets, which had been the major catalyst for metals & mining investments, has also been less robust. But there are only five or so good quality global managers in this space; it is very, very small.

The key for this market will be pricing and seller motivations.  There have been an increasing number of buyers for these assets in the secondary market, including traditional secondary fund managers.  Potential sellers of oil and gas assets may be reluctant as these have delivered very attractive returns over the last five years and LPs are happy with their returns. There are always going to be sales due to changes in portfolios, investment philosophy, personnel, etc.

For other forms of natural resources, such as timber and farmland, we see a limited number of sellers and deals.  Although fossil fuel divestment polices by investors to support environment friendly investments could create secondary opportunities.