Scoring sentiment: Rede’s Zafir on aged primaries and liquidity

Rede Partners, a London-based advisory firm and placement agent, issued its Rede Liquidity Index in February based on responses of 160 LPs representing around €1 trillion in capital allocated to private equity. In its scoring system, a baseline score of 50 represented no change in LPs’ expectations from the previous 12 months, a score above 50 indicated an improvement and a score below 50 indicated a decline. Secondaries Investor recently caught up with Yaron Zafir, head of secondaries, about the findings of the report and the increase of aged primaries deals.

Your index found that LPs are expecting to deploy more capital to overall private equity than secondaries with a difference of 12 points. Is that gap surprising?

Yaron Zafir

YZ: This isn’t particularly surprising, as although there is a gap between the two numbers they are both positive scores and point to similar LP sentiment. To put this in context, 2016 was already a record year of fundraising volumes on the primary and secondaries side. Both RLI scores are above 50, indicating LPs expect to deploy even more capital to private equity in 2017. This tells us that there is strong LP appetite across the sector covering both general and secondaries asset classes.

The RLI shows a marked difference between the different investor types and their sentiment for deployment to secondaries funds and investments. Can you explain the reasons behind these differences?

There is certainly a bifurcation between the two subsets we’ve called Group A (funds of funds and consultants) and Group B (asset/wealth management, insurance, pensions funds, family office, endowment) with collective scores of 71 and 44 respectively. Group A are likely to deploy capital into the secondaries market directly, through their own managed funds or advised pools of capitals, and with lots of dry powder at their disposal they are eager to deploy more – we are clearly seeing this being reflected in the market.

Respondents in Group B, on the other hand, are more likely to deploy capital indirectly, through commitments to third-party managed secondaries funds and accounts (such as the ones managed by Group A respondents), and with a significant amount of capital already raised by such vehicles, some may want a slight pause before committing even more.

Looking at the actual market, what types of secondaries investments are you seeing increase?

 YZ: As the secondaries market continues to be competitive, we’re seeing investors considering a wider range of secondaries transactions. A good example of that are aged primaries, which are increasingly gaining attention from secondaries buyers. This is a situation where you invest in a fund as a primary commitment when the fund is already over 30-40 percent invested. In this sense, the approach straddles both pure primaries and pure secondaries.

For an increasing number of investors, a major attraction of making such an investment is that when you make the primary commitment you already have visibility on some of the underlying assets and can apply your secondaries due diligence capabilities. It’s a very viable type of investment with approximately half of our top 100 secondaries buyer relationships able to commit capital to this strategy.

Some secondaries buyers like to buy at a discount. If you commit to an aged primary, how do you get a discount?

YZ: We have seen situations where assets in the portfolio after investment have appreciated in value or at least fundamentally generated value, even if they haven’t been marked up yet. In such situations, there would be implicit discount value for investors investing via an aged primary, as they would still be able to commit to the fund around cost level even though there has been some appreciation on the assets.

However, there are also secondaries buyers that are happy to invest into aged primary situations without requiring such an implicit discount. For them the benefit is in having greater visibility into the portfolio and the J-curve mitigation that arises from investing into a more mature fund.

When a placement agent is working on a fund that is 30 percent to 40 percent invested, are they also reaching out to secondaries buyers they know can make aged primary commitments?

YZ: Yes, absolutely. In reality it’s important to remember that most secondaries investors are in any case not pure secondaries investors – for example, they are consultants or funds of funds. Therefore, it’s highly likely they have already had been on the radar of the placement agent for this fundraise.

From the GP’s perspective it is often the same name, the same relationship and in most cases still the same people when they are dealing with an LP, regardless of whether the LP views it from a primary or aged primary angle.

This is a good example of where the placement agent can add real value – by knowing that a certain LP has an appetite for aged primary investments they can pursue this approach with that LP once the fund is sufficiently invested.

Yaron Zafir leads Rede’s secondaries practice and is also involved with origination activities across both primary and secondaries mandates. He has more than 14 years of private equity experience including GP-led restructurings, captive GP spin-offs and fund interests portfolio sales. Prior to joining Rede, Zafir worked Paul Capital where he co-founded the London deal team.