Over the past five years the secondaries market has quadrupled in size, from $10 billion to nearly $40 billion in annual transactions; growth so staggering that the dynamics, participants and methods of conducting business were forced to evolve to keep pace.
While the basic building blocks of transactions, like LP portfolio sales, still underpin the secondaries market, the dramatic increase in capital has driven the proliferation of transaction types. As a result, secondaries investors and advisors have broadened their approach to encompass all manner of LP or GP “liquidity solutions,” rather than just standard transactions.
As we’ve seen in many other financial sectors, there is an increased emphasis on specialisation as a market grows. In Secondaries, buyers are focusing on more specific strategies and advisors are being increasingly selective about the arenas in which they compete.
Buyers used to focus on buyout and venture capital opportunities, but they have acquired a more sophisticated palate. Their focus has broadened to include special situations, energy, commercial real estate, natural resources, real assets and infrastructure and credit.
Since 2010, we have witnessed the buyer universe splinter into more tailored segments relating to transaction size, geography, underlying fund structures, asset types, vintage focus and, more recently, market segment.
We believe there are two major segments: LP-led transactions and GP-sponsored transactions. While the LP part of the market has become increasingly commoditised, the GP-sponsored side remains highly differentiated; each situation requires a solution tailored to satisfy the distinct needs of that sponsor and its LP base.
At its core, any secondaries transaction is simply a trade. Given today’s record level of dry powder, conservatively estimated at near $70 billion, a lot of trades need to be done. Buyers recognise that they cannot continue to pay tighter and tighter discounts for cookie-cutter LP portfolios and hope to deliver the returns they have achieved and, in many cases, marketed to their own investors.
Buyers, therefore, need to be innovative in how they deploy their capital. Many buyers have broadened their mandates and created new secondaries allocations within their overall portfolio to uncover more attractive – and differentiated – opportunities.
GP restructurings have become the most popular non-traditional secondaries transaction, but there are many other types now being executed. If an advisor or a buyer seeks to be a “full service” solutions provider, developing expertise in these emerging areas will be critical to remain on the cutting edge of the market.
One segment of the market in which we are noticing a healthy rise is preferred equity or fund-level financings. Several were executed in the global financial crisis, but now there are firms with mandates and committed capital dedicated to this area.
The traditional buyer community has noticed this opportunity and buyers are increasingly trying to determine how competitive they can be within this segment. Typically, the new investor is providing capital to a sponsor for follow-on investments for specific portfolio companies and/or capital to distribute to its underlying LPs. In fact, some refer to these transactions as fund-level dividend recapitalisations.
Credit is a new and exciting entrant to the secondaries market. As private debt and direct lending continue to grow in the primary market, new types of secondaries opportunities are arising. For example, there are growing numbers of spin-outs of credit portfolios and their investment teams. These are driven largely by the continuing reduction of risk-based assets and principal investment businesses among banks and other large financial institutions.
Finally, there are other transaction and asset types that may develop into larger segments of the secondaries market including, for example, general partnership interests, fund securitisations, leveraged solutions, direct real estate, timber and agriculture and non-performing loan portfolios, to name a few.
The dramatic growth and maturity in the secondaries market over the past five years has required an increased level of sophistication from buyers, fulfilling its role to provide liquidity solutions for private market investors.
Sixpoint Partners is a registered broker/dealer and a member of FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). The firm has offices in Chicago, San Francisco and Hong Kong, in addition to its New York headquarters.