As buyside competition has increased over the last few years, dedicated buyers have refined their strategy to focus on segments where they feel they can be most successful. Consequentially, the market has experienced the beginning of a fragmentation in the dedicated buyer universe into two main categories: large portfolio buyers and niche specialty buyers.
Large portfolio buyers use their scale to diligence sizeable transactions efficiently, to cover a majority of the potential fund universe on a real-time basis and to utilise favourable leverage terms to improve expected returns. These buyers have been able to consistently raise multi-billion dollar funds and have generated relatively stable returns for their investors.
Niche speciality buyers focus on gaining an information advantage in a specific segment of the market so that they are optimally positioned when assets in their target universe are available. Niche buyers tend to raise moderately sized funds and are more selective as to the specific assets they purchase. While a concentrated focus has the potential to deliver outsized returns, it does not provide the same level of portfolio diversification, which can help mitigate negative shocks.
This dynamic is largely forcing mid-sized generalist buyers to shift focus towards one end of the spectrum, which has improved demand depth in less traded strategies. Dedicated buyers of real estate, energy and infrastructure have improved the sale-ability of these fund strategies and Greenhill Cogent expects that additional capital and resources will continue to move into these areas of the market. Increased buyer specialisation is also encouraging buyers to use novel transaction structures and financing arrangements, further differentiating a niche strategy from the broader buyer universe.
GP-led transactions have been among the fastest growing segment of the secondaries market and the underlying growth drivers of this trend are expected to be prevalent for the foreseeable future. Many early GP-led transactions were driven by firms that needed a transaction in order to stabilise their franchise. However, market acceptance has expanded the profile of GPs interested in exploring a transaction and it now encompasses the full spectrum of manager strategy and quality. Regardless of fund size or historical track record, nearly all managers are actively exploring ways that the secondaries market can help to achieve strategic priorities in an LP-friendly manner.
The potential emergence of venture and real assets GPs that have launched, or who are considering, a GP-led transaction has the ability to drive volume growth in this segment of the market for some time to come. Transactions with buyout managers should continue to be the bulk of GP market volume in the near term but in the medium term the strategy mix should shift towards other fund strategies.
As transactions are becoming more prevalent, LPs are beginning to take a more active role in shaping GP-led transactions to ensure their best interests are considered throughout the process. Greenhill Cogent expects that as GP-led activity persists, LPs will continue to become more proactive in this segment of the market. The underlying drivers of historical secondaries market growth are still present today and should continue to encourage increased transaction diversification, market depth and LP participation. Secondaries market pricing is currently near record levels and Greenhill Cogent expects that average market pricing should remain stable over the medium term, even as pricing dispersion between individual funds fluctuates. Market supply has diversified away from buyout and venture funds as transaction options in other strategies grow. Increased specialisation of the secondaries buyer universe should further improve market depth and seller optionality. Traditional LPs, asset managers and GPs have on average increased their knowledge of, and participation in, the secondaries market, and Greenhill Cogent expects that this is a structural trend, which is only in the early stages of developing. Given the growing prevalence of the secondaries market, a thorough understanding of the ways in which the secondaries market could be used to more efficiently achieve strategic priorities should be a priority for all institutional investors.
Brian Mooney is a managing director of Greenhill Cogent and has more than 15 years of secondaries market experience. Prior to co-founding Greenhill Cogent, Brian was part of the investment team at The Crossroads Group where he focused on secondaries acquisitions as well as primary investments and equity co-investments.
Jeremy Joersz is a vice-president at Greenhill Cogent, part of Greenhill’s Capital Advisory group. He joined Greenhill Cogent in 2010 and is a member of the firm’s secondaries advisory team. He is responsible for all aspects of client engagements and transaction execution, including preparation of engagement materials, valuation analysis, due diligence, structuring and marketing.