What is your vision for Pantheon’s private equity secondaries business? Can we expect significant changes?
RS: We’ve seen this market evolve both in terms of its depth and its breadth – there’s more choice than ever before. It’s also evolved in terms of complexity. Our strategy is to continue to exploit inefficiencies in the market – because it is a private market and there are inefficiencies – and we do that by leveraging our distinctive platform, our globally-networked primary business and all the other expertise and resources of our wider platform.
MJ: Part of our strategy is to be very selective, finding pockets of value across the private equity secondaries market where we see long-term value that’s not reflected in the figures. To do that you have to be highly disciplined.
Elly Livingstone has been a prominent figure for a long time. What does his new role entail?
MJ: We are a global business, we have stakeholders in key markets around the world, and we concluded that our scale and presence really required on-the-ground representation in two strategically important markets.
Elly continues to be a fully involved member of the partnership and the investment team. We are as busy as we’ve ever been in terms of dealflow – $22 billion in the first half of this year. And there are a lot of more complex deals that require more senior involvement, particularly in the GP-led space where it’s important to have that experience in negotiating directly with general partners.
What keeps you awake at night?
RS: I think it’s fair to identify the amount of capital that has been raised to pursue private equity secondaries transactions. In addition, leverage is being increasingly used to acquire diversified private equity portfolios. The good news is that the supply of deals continues to increase. We are seeing more transactions from pension plans, endowments, foundations and fund of funds in addition to general partners seeking liquidity solutions for their limited partners. As a result, the private equity secondaries market is broader and more diverse than ever.
MJ: This isn’t a risk but it’s something I think about all the time: are there opportunities that are right under our nose that we haven’t noticed? We are in conversations with general partners that we have known for more than a decade. Sometimes we don’t contemplate doing a transaction because we’ve never thought of the relationship in that way. The onus is on us to develop these opportunities. Are we being as proactive as possible in exploring transactions with general partners?
Is sourcing a problem?
RS: Definitely not. One of our key roles right now is thoroughly screening deals. We have a lot of dealflow coming through and picking which ones we want to work on is becoming increasingly important. Only approximately 2 percent of all the private equity secondary transactions we screen end in a transaction.
RS: Another trend we’ve observed is that transactions are being done at an accelerated pace so you no longer have the luxury of spending weeks doing diligence on assets, then submitting an indicative bid, then doing confirmatory due diligence… Today sellers and intermediaries look to execute very quickly. That highlights the importance of having the information in hand so you can move quickly.
To cite a very recent example, I received a call from a market participant seeking indicative bids on a very large LP portfolio to be delivered within 11 days. That’s a very short period of time on limited information. If you are not invested in those funds with those general partners there is absolutely no way you can be competitive.
MJ: You will likely see some parties put in binding bids within that period to try and get some competitive advantage. The higher quality LP trades are moving very rapidly. To Rudy’s point, ten years ago you typically had a three-week period for indicative bids, several parties would go through to the final stage and there’d be another month before final bids. The broker would provide all the information and make introductions to the general partners. Now if you don’t have the information, you can’t bid.
In a world where you and your rivals all have the same information, how do you remain competitive?
RS: There’s different levels of information and types of relationship. If you don’t have an investment in the fund, you’re at a distinct disadvantage. If you’re a small investor in the fund you may get some basic information. But if you are a significant investor in the fund, have a longstanding relationship with the general partner and may even be on their advisory board, then generally the information you receive is significantly better.
MJ: GPs are also becoming increasingly active in managing who can buy positions in their fund. They may only allow a transfer to an approved list of buyers and we have been the beneficiaries of that kind of dynamic numerous times. You might be in a very competitive process and suddenly there are only two or three of you. We’ve been very successful in transactions where we’ve managed to pull an individual fund out of a broader portfolio.
– Rod James contributed to this report.