The case for standalone LP-led and GP-led vehicles

ICG and Manulife closed on their respective debut LP-led and GP-led vehicles this week. Both firms believe the secondaries market will continue to specialise in this way – they’re just early adopters.

Why is there a need to break out GP-led and LP-led strategies? The different strategies require different sets of skills. 

There are glaring similarities and differences between two secondaries first-time funds that reached final close this week.

ICG’s LP-led focused unit reached $1 billion for its debut strategy, Secondaries Investor reported on Tuesday. Including co-investment special purpose vehicles and SMAs, the London-headquartered asset manager has received total commitments of $1.6 billion for its LP secondaries strategy. 

Later in the week it emerged that Manulife Investment Management’s GP-led secondaries programme has reached $610 million in aggregate commitments, which includes the final close of its debut fund – although the strategy’s global co-heads Jeff Hammer and Paul Sanabria declined to disclose how much its standalone closed-end fund had raised as part of the overall programme. 

While these strategies sit on the opposite ends of the spectrum, in interviews with Secondaries Investor this week both the senior leadership of ICG’s and Manulife’s strategies extoled the advantages of their specialised focus versus their more generalist peers.  

“We at ICG very firmly believe that those are two fundamentally different types of investment strategies,” head of private equity fund investments and LP secondaries Oliver Gardey said, a sentiment shared by his peers at Manulife. Furthermore, history shows that eventually markets do tend to specialise as they mature, Sanabria said.  

On the GP-led side, you need both direct equity underwriting skills as well as secondaries market skills housed within a single fund, Sanabria explained. On the LP-led side, ICG’s team – complemented by its Strategic Equity business – is “underwriting effectively hundreds of companies in dozens of funds with very little information. You have to have the database, and therefore, that’s attractive and sustainable in the returns because you need to have access to the information.” 

The capital needs must also match what a fund is trying to achieve, particularly as it relates to cost of capital, Sanabria said. “You have to have the right cost of capital to get transactions done… the levered beta that exists in the traditional LP market [is] much more of a private equity index to the unlevered alpha, [it’s] more conviction-based, [it’s a] much more granular view of portfolio construction.” 

For ICG, it wants to get back to basics with its LP secondaries strategy, chasing the returns sought by investors backing early secondaries vehicles that primarily invested in LP-led deals.  “Our premise was to investors: we’re telling you exactly what you’re going to get and we’re delivering you the benefits of secondaries, which is the early liquidity, the no J-curve, the diversified portfolio, PE returns with credit-like risk,” head of Americas LP secondaries Ryan Levitt said.  

There is certainly evidence in the market of further specialisation in this way. While more private capital firms continue to pop up with dedicated strategies, legacy secondaries players like Blackstone’s Strategic Partners and Carlyle’s AlpInvest have opted to raise standalone GP-led funds.  

Fundraising on the whole has been slow-moving given the strain LPs have faced over the past couple of years. GP-led focused funds have proven to be a harder sell to investors, market participants have told Secondaries Investor. There is a hope that as more continuation funds are exited and performance data becomes available, an increasing number of investors will take the plunge in backing these vehicles.  

While ICG and Manulife call themselves early adopters, they certainly believe they won’t be the only ones to split out investment strategies. Expect to see more dedicated LP-led and GP-led vehicles to launch as the growing base of market players look to meet the specific desires of their LP base.