The march towards specialisation

New and existing secondaries firms are becoming more focused on particular niches, which is a boon for LPs wanting more specificity but also a sign that returns will be less uniform in the future.

As the secondaries market grows and develops, so too does the buyside. Historically differentiation within the private equity asset class has been limited to secondaries buyers that focus on directs versus limited partnership interests – but that’s changing.

“People’s strategies evolve over time from lessons learned,” an advisor told me last week. Firms learn from past transactions and narrow their investment focus as a result. “That could range from ‘we don’t like doing venture capital,’ to ‘we’re not comfortable with energy’.”

In the last couple of years, groups have also emerged that focus specifically on the fund restructuring opportunities that have become a feature of today’s secondaries market. Others are honing a focus on lower mid-market deals, like Michael Bego, previously a partner at Willowridge Partners, who left to found Kline Hill Partners and plans to raise a $120 million fund to focus on deals in the single-digit million range.

Another new entrant is Whitehorse Liquidity Partners. Founded by Yann Robard, former head of secondaries at the Canada Pension Plan Investment Board, Whitehorse will focus on providing preferred equity in secondaries transactions. The strategy isn’t new but aside from London-based 17Capital, very few firms focus on preferred equity, which allows investors to bring in liquidity without relinquishing the assets and while continuing to benefit from future upside.

“It’s structured almost like a piece of mezzanine,” said another advisory source of the niche strategy. “It has first priority on distributions and it’s senior to what LPs would get. It’s a much more efficient cost of capital.”

What impact will the march towards specialisation have on the industry?

For one, limited partners investing in secondaries will be able to tailor their exposure in a more granular way than they’ve been able to in the past. That’s something we recently spoke with the New Mexico Educational Retirement Board about, in case you missed it.

Another expected outcome is that performance is likely to vary much more among the buyside than it has in the past.

“You should start to see returns diverge because firms are starting to have such diverse strategies,” said one managing director at a large secondaries firm.

Do you think specialisation is a good thing for the secondaries market? What does it mean going forward? Tell us by writing to marine.c@peimedia.com.