It’s arguable the evolution of the secondaries market has been the biggest game changer for both LPs and GPs over the past decade. In 2010, the idea of a limited partner selling a stake in a GP’s fund still carried the stigma that the sponsor was a failed manager or there were problems in its portfolio.
Today, trading limited partnership interests has become commonplace and has gained in scale, with multi-billion-dollar portfolio sales hardly raising an eyebrow from the GP community.
“It has made private equity actually a relatively liquid asset class,” says Richard Lichter, who co-founded secondaries giant Lexington Partners in the 1990s and is now managing director at Stamford-based Newbury Partners.
With this increased liquidity has come an about-turn in how investors approach the asset class. An LP committing to a fund at the beginning of the previous decade could assume its capital was locked up for at least 10 years.
The proliferation of secondaries buyers and advisory firms, coupled with high levels of dry powder, have meant a pension fund that wants to consolidate its GP relationships, an endowment whose incoming chief investment officer wants a change in strategy, or a foundation that wants to reduce exposure to a particular region or strategy can now do so with high transparency, efficiency and in as little as one month.
“There are opportunities to get off the merry-go-round earlier in an investment fund’s life cycle now that are positively impacting the primary fundraising market in terms of how LPs think about their commitments to funds,” says Michael Belsley, who leads Kirkland & Ellis’s secondaries practice.
CPP Investment Board, Canada’s largest pension, made its last commitment to a secondaries fund as an LP in 2008 and has evolved to become one of the largest buyers in its own right. Secondaries has been a “unique” way for it to scale its private equity exposure, says Louis Choy, a senior principal who helps lead the pension’s European secondaries team.
“With primaries, you make commitments, and that is deployed over the next couple of years with returns coming through in the subsequent years, whereas with secondaries, you’re buying into existing assets – assets that your partners are managing already.”
While LP trades still comprise the bulk of the market, GP-led secondaries have allowed fund managers to create liquidity for their LPs while holding onto prized assets. This has been a “huge change” for GPs over the last 10 years, says David Atterbury, managing director at HarbourVest Partners.
“It has become good fund management practice for general partners to offer liquidity at the end of a fund’s life – and there’s now a way of doing that,” Atterbury says. By transferring assets into a continuation vehicle, LPs can either cash out or roll their exposure into the new vehicle, and the GP remains aligned by rolling their incentives into the new structure, he adds.
Over the next 10 years, private equity will become an asset class that provides multiple options for both investors and sponsors, says Holcombe Green, global head of private capital advisory at Lazard.
“We’ll start to see more financial instruments crop up that make the secondaries market look more like a financial market,” Green says. “Derivatives on secondary trades, trading platforms for LP interests. If the market gets enough scale, you’ll start to see it act more like a securities market.”