This article is sponsored by Tikehau Capital and appears in the May issue of affiliate title Private Debt Investor.
Could you tell us a little about the background to the secondaries effort at Tikehau?
I joined Tikehau in November 2019 with a mandate to launch into the private debt secondaries market, investing capital alongside our investors. The market was evolving and there was already interesting dealflow, so it seemed like the perfect time for us to start looking around and underwriting deals as we came across them.
Fast forward 18 months from that point and we’ve looked at more than 100 deals and have invested in quite a few. From the beginning we were interested in all private debt funds and strategies – not just LP stakes but also actively reaching out to GPs to explore GP-leds, which are becoming a very big and growing part of the secondaries market.
What are the key features of the private debt secondaries market?
There are two main components to the market now. LP stakes are a traditional, very big part of the secondaries market, where LPs come to market seeking liquidity and essentially trying to sell what they bought or invested in some time ago. What has happened during the last year is that I have seen firms switching to a very proactive portfolio management model. Some are driven by external factors, some have seen their liabilities change and have to match what they have on the asset side, some are driven by uncertainty and the big jolt experienced last year, and some of it is simply the market becoming more mature.
Even more exciting is what’s happening with GP-leds. I was looking at live deals that we’re working on right now and roughly half are LP stakes and half are GP-leds. We really like GP-leds because it gives us more opportunity to partner with GPs we like and they are very creative and sophisticated partners. In some cases they are resetting their liabilities and rethinking how they can set up continuation vehicles or help some of their LPs to get liquidity, so it’s a very creative and engaged process.
What will ensure the continued growth of the market?
One factor is that there is lots of primary fund growth and what happens on the primary side is a big driver of the secondary market too. As long as private debt is attractive as an asset class it will attract primary capital from LPs. The GPs will then find interesting deals and will continue raising funds for various strategies. I think that will underpin the growth of the secondary market. If the primary market is $1 trillion then even just a few percentage points of that gives you a very significant number in terms of dealflow.
Did the pandemic drive more activity last year?
Was last year a significant trigger? I would argue that uncertainty and more active management in terms of assets and liabilities on all sides was probably an additional tailwind. But GP-leds had already been gaining traction and momentum in 2019, so I’d say last year probably consolidated that growth. It wasn’t the watershed moment for GPs to really start treating secondaries as something of interest from their point of view.
What’s the LP view of private debt secondaries? What attracts them to it?
I’ve been looking at secondaries for a number of years now. At one point I was with Zurich Insurance where we were actively looking at private debt primaries but also secondary deals, and that was seven years ago. It was driven by several things that we considered of fundamental importance for us, which were diversification, deployment (we wanted to get money deployed but in a very conservative manner) and yield. Fast forward to today and I think investors who come to us express similar sentiments. They are very interested in diversified portfolios and the ability to invest not just in two or three years’ time but have some deployment capacity now.
“It’s a nascent market and there are very interesting dynamics in terms of low competition relative to the volume of deals”
In terms of why they are more interested now, it’s the dealflow coupled with more education and greater understanding. People are looking at this area in greater numbers and are really interested. Those who come to appreciate it sometimes come from the private equity secondaries side and have started investing in some of the primary funds on the private debt side. There are also people with alternative credit allocations and they are seeing interesting opportunities they don’t see in structured credit or some other markets.
Which area of investment is most often compared to private debt secondaries?
The obvious one is private equity secondaries because it has lots of features in common like the diversification you obtain from different vintages and strategies. The yield component and fairly short duration for private debt secondaries are the most obvious differences.
It’s a nascent market and there are very interesting dynamics in terms of low competition relative to the volume of deals. We find ourselves partnering with firms we would be competing with in other areas because the dealflow is bigger than all the combined capital that has been raised so far.
What types of deal will we see most of in future?
I think one thing that is going to drive interest in this space is the dealflow. That’s the big factor in terms of the growth of the opportunity and how practitioners such as us look at it. I’m very optimistic about dealflow on the basis of what we’ve seen so far. Despite the renewed interest and new entrants, my sense is that in the next one to three years there’s going to be such significant dealflow that there will be enough for all of us because it exceeds the capital that I’ve seen coming into the space and that dynamic will remain there for the short to medium term.
What can change that is the question mark over what happens with GP-leds, which is becoming a bigger portion of the overall secondaries market. So far, the trend has been going all one way but at some point it’s probably going to level out. Maybe from one-third it becomes one half of all the deals, and at this point it’s very hard to say when it will level out and become a similar level to LP stakes.
I don’t want to make wild guesses but I would take a very robust view on dealflow. Last year there was about $15 billion of deals according to market participants and it’s not very hard to imagine that it can double within one or two years, so I’m very optimistic as we move forward. When you look ahead five to 10 years, it becomes harder to predict.
Olga Kosters, based in New York, is the head of private debt secondaries at Paris-headquartered fund manager Tikehau Capital.