Three-quarters of LPs commit to secondaries funds – survey

Regional differences are still palpable in attitudes to investing in the strategy, according to sister publication Private Equity International's Perspectives 2018 survey.

Limited partner appetite for secondaries funds is at an all-time high. More capital was raised for the strategy in the first six months than any other half-year period, with almost $24 billion collected for private equity secondaries vehicles alone as of the end of June, according to PEI data.

By the end of the third quarter, the amount of capital raised for buying stakes in private equity funds hit $26.9 billion, slightly surpassing that raised at the same point last year. It is clear LPs are hungry for secondaries: according to the Perspectives 2018 Survey, almost three-quarters of limited partners globally commit to private equity secondaries funds in some way, either through de ned allocations or opportunistically.

Regional differences are palpable: North American LPs are much more opportunistic when it comes to the strategy, with almost 72 percent responding that they invest opportunistically versus less than half in western Europe.

Source: Private Equity International

“A lot of European LPs have so far not taken the time to think about the place of a secondaries GP in their portfolio,” says Sunaina Sinha, managing partner at London-based placement agent and advisory firm Cebile Capital. “They are weighing [secondaries] against their existing portfolio and saying, I don’t need to change. There’s a lot of, if it ain’t broke, don’t fix it.”

Still, more than one quarter of LPs globally do not commit to private equity secondaries funds, according to the survey. This figure isn’t surprising as LPs have a multitude of other alternatives strategies to choose from – buyout, growth, venture – which deliver higher returns, Sinha says. While an attractive way to beat the J-curve by deploying capital faster as well as diversifying a portfolio by vintage and manager, secondaries do not appear de rigueur in an investment portfolio…for now.

A few developments this year signal that LPs are becoming increasingly savvy when it comes to the strategy. In October Singaporean state-owned investor Temasek emerged on the buyside of a portfolio of buyout stakes from British Columbia Investment Management Corporation, and State of Wisconsin Investment Board invested $231 million over the summer in acquiring stakes in eight real estate funds.

While some of these deals are sporadic, other traditional LPs are in for the long haul. In May, Public Sector Pension Investment Board, one of Canada’s largest public pensions, told sister publication Secondaries Investor it was planning on building an in- house secondaries team as early as 2019. Clearly, LPs are starting to see the bene t of being on both sides of secondaries deals.

LPs are also becoming more selective in the type of secondaries strategy they prefer. According to a survey conducted by PEI and Switzerland-based Montana Capital Partners in September, family offices that invest in secondaries are most likely to do so via direct secondaries – acquiring portfolios of direct minority stakes in companies – than any other method.The reason? “Carry and fees – nothing more complicated than that,” says Richard Clarke-Jervoise, head of private equity at Stonehage Fleming.

As the secondaries market races towards a potential record year for both fundraising and deal volume – intermediaries are predicting at more than $42 billion in closed transactions – the year ahead for the market looks promising. Giant firms including Ardian, Lexington Partners and possibly Coller Capital may be eyeing flagship fund launches in the next 12 to 18 months, and niche players focusing on strategies such as preferred equity and GP-led restructurings will no doubt hit the fundraising trail.

The range of opportunities for LPs to access the strategy is more attractive than ever – secondaries firms will do well to strike while the iron is hot.

Look out for more insight into investors’ thinking in PEI’s Perspectives 2018 special in December.