Larry Thuet, managing director and co-founder of secondaries advisor Park Hill, tells us whether the market is changing and whether securitisations will increase.
Proponents of GP-led transactions say they are no longer just for private equity firms in need of rescue, but part of a healthy private capital market. Looking at the transactions you are working on, are these ‘healthy’ GP brands?
Yes, we have made that a focus of ours. A healthy manager should be able to create a liquidity solution for an older fund and return capital sooner; it is most often the duration mismatch that needs to get solved. All things being equal, most LPs would prefer a 10-year hold to a 15-year hold.
We have ongoing discussions with best-in-class firms that are looking to provide liquidity and optionality to their LPs. We have very thoughtfully avoided transactions that create misalignment. We have a brand and reputation to protect and we look to align ourselves with the highest calibre GPs.
It’s the time of year when secondaries advisors come out with estimates for the previous year’s market activity. What’s the Park Hill view on 2016?
We have seen numbers ranging from $30 to $37 billion. The market does not consistently account for transaction volume and unfunded commitments. We regularly track the market from a bottom-up perspective and our estimate for 2016 is $35 billion.
This represents a decline on the previous year…
Yes. The last quarter of 2015 and the first of 2016 saw very volatile public markets, which hit LP sentiment around selling. There is also a cyclical issue: if you look at the primary activity in the years 2008 to 2010, less capital was put into the ground. These are the vintages that would naturally start trading in 2016, so there was a dearth of product in the market.
Last year Park Hill advised on the securitisation of $1.1 billion-worth of private equity fund stakes for Singapore’s Temasek. Will this be the first of many ‘collateralised fund obligations’?
I don’t think this type of transaction will transform the industry. These are complicated solutions and very situation- and client-specific. I don’t see them becoming ubiquitous. That said, we expect to bring more CFOs to market this year.
To which situations do they apply?
They make most sense for asset managers and insurance companies, and for some pension plans. Temasek, while it is sovereign-owned, is an asset management business. There was a civic element to what they were trying to achieve, which was to create a product for the retail market in Singapore.
What’s the attraction for an insurance company?
Insurance companies are natural sponsors for this type of transaction because of the RBC [risk-based capital] charge regulators put on equity. The rated debt has a lower capital charge, which allows insurance companies to deploy equity capital more efficiently.
Would other asset managers — the Fidelitys of this world — look at these as a way to create interesting value-add investment products?
Asset managers will look hard at this solution but there aren’t going to be 20 per year from now on…more likely a couple per year for the next few years. [Collateralised fund obligations] will add to secondaries market volume, but not in the same way that the use of leverage or fund recapitalisations has.
This interview originally appeared in the March 2017 issue of sister publication Private Equity International.