Opportunities – and risks – abound in the secondaries market

Gunter Waldner, a former AlpInvest Partners executive, says the market is still littered with downside risks, making disciplined manager and asset selection more important than ever.

Tyrus Capital manages short-duration secondaries funds aimed at individual investors, small institutions and traditional institutional players. Secondaries Investor spoke to head of private equity Gunter Waldner, formerly of AlpInvest Partners, about the drivers behind the strategy, the kinds of assets it targets and how the market might not be out of the woods yet.

What are the reasons for investing in a short-duration fund?

It greatly reduces the opportunity cost of private equity investing. For an individual, 10 to 12 years is a huge chunk of life. We have five-year funds, plus one, plus one, which launch every 12 to 18 months. We are now on Fund V, targeting between $150 million and $200 million. We keep them open for only a 12-month investment period and usually have dealflow lined up, so the funds tend to be 100 percent invested within weeks and start distributing pretty much from day one.

What sort of assets work well in a short-life fund?

We hardly ever buy anything younger than seven or eight years old and often buy assets  that are semi-liquid. The assets need to be of quality and still have good alignment with the GP. An ideal scenario is a fund in year eight or nine with four or five companies left. Let’s say two or three are in very good shape, have the track record and can be monetised within a few years. Maybe there are two others that are held at very low valuations because there have been past issues, with a turnaround being underway.

We also target PE assets with a high degree of public exposure. Let’s say you have a buyout fund that’s 80 percent listed. You could buy that exposure at a 20 percent discount and do something quite smart with the structuring. We look at co-investments and have also done them on a primary basis.

You are bearish on the bounce-back in valuations. Why is that?

Gunter Waldner, Tyrus Capital

I do believe the rebound we witnessed at the end of 2020 was overly fast and aggressive and at least to some extent driven by the [vaccine-related] current public market exuberance. Most of the good news at this stage seems to be priced in.

Other than particularly exposed sectors such as retail and leisure, we have not seen the widespread insolvencies that were initially expected. I think, sadly, there will be a significant pick-up in 2021 for companies that were kept on life support by state money last year. A multitude of downside risks led by the impact of new virus strains, potential new restrictions and lockdowns may compound the wave of corporate distress.

That said, I believe this will result in an excellent opportunity set this year for experienced secondaries buyers. We are excited by the types of opportunities we are seeing in our pipeline so far and are optimistic there is much more to come.

What does this mean for activity in the secondaries market this year?

We could see increased dealflow with more motivated and, in certain cases, distressed sellers or sellers who have overcommitted themselves.

Take American college and university endowments, whose tuition fee-
based business model has suffered while having to bear the ongoing high fixed costs of
campuses. Greater uncertainty also brings more attractive pricing and the opportunity
to buy into fundamentally sound companies that are temporarily underperforming due
to covid-19 at attractive discounts.

What potential pitfalls lie ahead for the secondaries market?

Valuations potentially having more downside is crucial. With increased dealflow, secondaries investors will have to be more disciplined than ever when it comes to choosing successful managers and focusing on quality assets. We will be even more selective, targeting larger, more established managers and prioritising more mature and de-risked assets.

Why are larger funds a better bet?

Having worked at AlpInvest Partners during the 2008 financial crisis and the years after, I know first-hand that smaller firms in some cases do not have that deep bench of
expertise and resources required to weather the pressures and workload of a recession.
The inherent diversification that large-cap funds bring is also a great benefit. All eyes will now be on the coming Q4 valuations and how the secondaries market reacts to the macro risks of 2021. For those able to take advantage, such conditions will cultivate plenty of exciting opportunities.

Tyrus Capital is an alternative investment firm with $1.6 billion in AUM across private equity, real estate, convertible bonds and structured finance