Scott Beckelman is a managing director in Greenhill’s capital advisory group. Based in New York, he is primarily responsible for advising LPs and sponsors on the sale and restructuring of their fund and direct company interests. He joined Cogent Partners in 2005.
Christophe Browne is a managing director at Intermediate Capital Group based in New York. He is part of the firm’s strategy equity team and focuses on GP-led private equity transactions. He previously co-founded NewGlobe Capital Partners in 2012 before joining ICG in 2014.
Daryl Li is a managing director at Ardian in the firm’s New York fund of funds (which makes both primary and secondaries investments) and co-investments teams. Ardian, which he joined in 2010, focuses mainly on LP portfolio transactions, particularly at the large end of the market.
Michael Pugatch is a managing director at HarbourVest in Boston focusing on the origination and execution of secondaries investments from LP portfolio sales to more complex transactions including GP-led deals. He joined the firm in 2003 after serving at UBS Warburg.
John Rife is a partner in Debevoise & Plimpton’s funds/investment management group, advising sponsors and investors on secondaries transactions including fund restructurings and other sponsor-led liquidity transactions. He also advises sponsors, including secondaries buyers and funds of funds, on fund formation.
Anthony Shontz is co-head of Partners Group’s private equity integrated investments for the Americas, focusing in part on secondaries transactions. He is also head of the firm’s Denver office. He joined Partners Group in 2007 and previously worked for Pacific Private Capital.
Innovation characterises this fast-evolving secondaries market, with the risks involved leading firms come up with creative structures. In part 2 of sister title Private Equity International‘s secondaries roundtable, participants discuss fundless sponsor restructurings, single asset deals and how to find the upside of a market downturn. Part 1 can be found here.
Innovation also continues with the emergence of new types of transactions.
“With these fundless sponsor restructurings, you have folks raising funds on a deal-by-deal basis and then spinning those assets into a continuation vehicle, de-risking the original investor base and moving the assets into a commingled vehicle going forward,” says John Rife, a Debevoise & Plimpton lawyer. “Those are pretty novel transactions. Argonne was the first one we saw and we’ve seen a few more since then.”
Michael Pugatch, a managing director at HarbourVest Partners, also notes the recent rise of single-asset secondaries, as well as transactions involving GPs looking for ways to reduce single-company exposure or where the GP owns an asset that fundamentally doesn’t align with the remaining assets in the fund.
“That’s a trend that only in the last 12 to 18 months we have started to see with a lot more frequency,” he says. “It really resonates with the GPs as another means to be able to generate liquidity for an existing investor base.”
The added risk attached to these transactions means there’s a high bar associated to all steps of the process, as Christophe Browne of ICG explains.
“We just have to find ways to mitigate the risk of that concentration,” he says. “We can do that through more intensive upfront asset-level underwriting, in terms of management meetings and site visits.”
Treating such investments like buyouts, he adds that risk mitigation also takes place through active management post-transaction.
As other parts of private markets develop, such as private credit, a secondaries market is also growing around those assets, albeit with new implications as the return profile varies.
“A lot of these debt portfolios don’t come through the traditional secondaries channels or intermediaries,” says Anthony Shontz, the co-head of Partners Group‘s private equity integrated investments for the Americas. “The buyer universe is also different. If you’re pricing these portfolios for a private equity-oriented fund, it’s probably not a good fit. But if you’re pricing them out of a debt fund or a permanent capital vehicle, then it is likely to make more sense.”
Soaring transaction volume and acute innovation are not the only signs that the secondaries market is doing just fine. Secondaries fundraising is also going strong with buyers raising mega-funds – despite a slight dip in fundraising in 2018 to $32 billion in total funds closed. It’s hard to see what could derail the market and change these dynamics.
“Over the short term, obviously macro disruptions – whether it’s an equities market dislocation or some significant geopolitical issues,” says Shontz. “That could cause sellers to take a step back and at least pause.”
In the last recession, secondaries buyers realised sellers had other options for liquidity besides the secondaries market in times of distress.
“One thing that we learned in the last downturn, when there was such a dramatic bid-ask spread and disconnect between where sellers were looking to transact and where buyers would perceive value, is that a lot of our largest clients opted to hold or otherwise shift the portfolios that they were looking to sell,” says Scott Beckelman, a managing director in Greenhill‘s capital advisory group.
Secondaries market participants also learned to adapt to market conditions and to be more creative with deal structures.
“One of the other things you’ve seen in past periods of volatility or dislocation is a pivot to other structures and being able to structure liquidity solutions to sellers involving portfolios of private equity assets,” Pugatch says. He mentions preferred equity and structured joint ventures as examples.
Overall, the participants around the table are optimistic about how a downturn in the economy would impact activity in the secondaries market.
“We certainly view a future downturn as a great opportunity for us as a buyer,” says Browne. “If nothing else, most people would agree that the last three or four years have been a market awash with liquidity and almost no distress. If you believe that a downturn will increase illiquidity and increase distress, then I think it will be a great opportunity for everyone around this table.”
However, the next downturn will not look the same as the last, particularly in the GP-led part of the market, which was in its infancy a decade ago and has not demonstrated yet how it would behave in a period of stress.
“I would expect a downturn to fuel the GP-led asset deal space,” says Rife.
“I would think you have a market disruption that impacts business plans put in place at the time of the acquisition – that creates a natural driver to consider rolling the assets into a continuation vehicle.”
One thing is for sure. Secondaries buyers are enthusiastic about the future of their market and about the prospect of further growth, particularly in volume, predicting it could reach the $100 billion mark by 2021. But who’s counting.
This article was sponsored by Ardian, Debevoise & Plimpton, Greenhill, HarbourVest, Intermediate Capital Group, Partners Group.