The resurgence of the LP portfolio opportunity for secondaries buyers, driven by a numerator effect caused by the outperformance of private equity, has been cast by those in the market as a way to balance out concentrated GP-led exposure, particularly from single-asset deals.
Increasingly, secondary buyers are looking to isolate and capture single-asset exposure. Most recently, Pantheon closed its Pantheon Secondary Opportunities Fund, which focuses on single-asset deals, on $624 million. Morgan Stanley is seeking $3.5 billion for its second fund dedicated to GP-led secondaries, Ashbridge Transformational Secondaries Fund II, which also has a key focus on single assets. These two are by no means the only ones.
However, “all things being equal”, buyers still gravitate towards multi-asset GP-led restructurings, Jefferies’ Matt Wesley said at a panel last month: “The more diversified deal will resonate more, it’ll get more attention.”
LPs in secondaries funds have yet come around fully to the single-asset strategy, Wesley added, though he also noted there is an undersupply of such deals.
Are LPs right to see multi-asset deals as safer or more diversified? Not necessarily.
A theoretical cluster of 20 single-asset deals could be as well diversified as a multi-asset deal, but is difficult to achieve within most funds’ single-asset concentration limits. “It makes little sense in terms of portfolio construction,” said Nigel Dawn of Evercore, speaking on the same panel.
Funds have the ability to control how exposed they are to a particular segment of the market with a pool of single-asset deals just as well as if they were investing in diversified GP-led deals, added a managing director at a secondaries buyer.
Consider too the benefit of positive selection bias inherent with single assets. Whereas historically GP-led restructurings had one or two assets with upside surrounded by more middling assets, now the focus is honed just on the one asset with upside.
Buyers are trying to show they have sufficient single-asset dealflow to justify raising or removing concentration limits, which were largely penned before the current boom in single-asset deals. They will need support from limited partners.
LPs in secondaries funds, especially those with active co-investment and minority investing programmes, will need to become comfortable rethinking their internal portfolio construction to match the opportunity set in the market, allowing GPs to lift their limits or committing to new vehicles that can do more single-assets.
“This artificial constraint is influential in keeping the market where it is,” said Dawn.