The importance of relationships in secondaries advisory

Staying small and leveraging relationship are the key to the secondaries advisories business, says Solomon Owayda, who recently founded Mozaic Capital Advisors with Christine Patrinos. Owayda has worked in private equity for more than 20 years.

The secondaries advisory space has become more competitive, how will Mozaic stand out?

The biggest difference with our competitors is that we’re an independent group. There are not that many independent groups because advisory firms are typically part of an investment bank. We see ourselves as a boutique firm that offers a full service, which sometimes means we are advising clients to hold assets – that differentiates us.

We’re not just trying to get the highest price for the seller. We’re not transaction-motivated, we’re relationship-oriented. I started doing secondaries in the early 1990s. I’ve built a lot of good relationships with a lot of good friends. We have to create auctions because we act as a fiduciary, but mainly we try to take the pain away from LPs. Only once we’ve agreed on what part of a portfolio to sell, we conduct a discreet auction.

Ultimately, our goal is to stay small. We’re two founders and want to provide a high level of touch to our clients. We don’t want more than three to four clients at a time. Currently, we’re working on three deals with one hoping to close soon.

What’s your relationship with Monument Group like?

We’re in a strategic alliance with Monument Group. We’re a registered representative of Monument and we share their offices in Boston. They have a big database of primary clients because of their placement business. And now, they can offer secondaries. We work together but we are independent.

What types of deals is Mozaic focusing on and what is the typical seller you see?

Most of what we’ve done is LP fund stakes but we’re also in conversations with some general partners about restructuring work. We’ve done private equity, venture, real estate, real assets including oil and gas, and infrastructure. We don’t do hedge funds.

As far as sellers, there’s a little bit of everything, from family offices trying to reduce relationships to pension funds actively managing portfolios. We also see fund of funds trying to close down old portfolios, and endowments that are over exposed to private equity. On the buyside, we have a little more than 100 buyers and we know exactly what they like.

What do you think has been some of the major changes in the secondaries world in recent years?

The market has become much more sophisticated. LPs aren’t shy to use the secondaries market as a tool to manage their portfolio. It’s amazing how there’s been a major shift. When we meet with potential clients, it’s not a taboo to discuss secondaries anymore. There’s also now a multitude of reasons for selling. During the global financial crisis, sellers needed liquidity. Then there was a wave of banks selling because of the Volcker rule. Today, some sellers want to limit the number of relationships they have or clean up portfolios of vintage funds. But for many, it’s purely an arbitrage to make money and take advantage of pricing. The shift has also happened on the GP side, with firms looking to meet new potential LPs.

How realistic are some of LPs’ pricing expectations?

Expectations of sellers are high but reality is slowly setting in. Funds are currently trading on average in the high 90s percent to net asset value, compared to par or even at a premium last year, due to recent volatility in the stock market. A lot of sellers expect to sell at a premium but then some may realise that 97 or 98 percent of NAV is still a good price. Nobody likes to sell at a discount. This is not going to change, but sellers are certainly evolving.

What do you see happening in real estate secondaries?

I see real estate the way private equity was 10 years ago. More players are now seeing the value. But it’s a bit different. In private equity, to value a stake, we use a couple of different methodologies based on the data including public comps, discounted cash flows and liquidity expectations. In real estate, there are of course valuation methodologies, but for many buyers it really depends on the market and the address you’re in. The value proposition is different. People are realising it, but it takes more time. Discounts are still higher than with private equity but they are shrinking.