While the majority of LP secondaries sales involve commingled funds, investors in separately managed accounts can sell their interests too, though there can be unique challenges when dealing with these vehicles.

A recent example of an SMA secondaries sale occurred last week, with Wells Fargo, one of the US’s largest banks by assets, saying it sold $2 billion worth of interests in Norwest Equity Partners and Norwest Mezzanine Partners funds to a consortium that included AlpInvest Partners, Atalaya Capital Management, Lexington Partners and Pantheon.

Wells Fargo said it was the sole LP in these funds.

Like any fund stake, SMAs can be sold via the secondaries market. Though less common than typical LP secondaries, they aren’t unheard of. In 2016, Partners Group and Abrdn’s then-named SL Capital Partners acquired a €500 million SMA from the California Public Employees’ Retirement System as part of the pension’s attempts to reduce its number of external managers.

In 2021, BT Pension Scheme sold out of a fund of funds SMA managed by Hermes GPE in which the underlying positions were moved into a continuation vehicle backed by CPP Investments – the third such transaction between the two pensions.

The comparative scarcity of SMA secondaries deals is likely due in part to the complexity involved in selling positions in funds of one. The original LP will more likely than not have particular agreements with the GP, something that can become tricky to maintain if a replacement LP comes in.

This is particularly so when an SMA is divided between multiple buyers. “You end up needing to renegotiate the documents between the buyers and the underlying sponsor to make everything hang together in a multi-investor context,” says John Rife, a partner at Debevoise & Plimpton.

The bespoke nature of SMAs can also mean buyers need to do more work to price their bids. As opposed to pricing flow-name funds – something that can be done relatively quickly and efficiently – assessing an SMA requires the buyer to look at assets that they may not necessarily be familiar with, as well as taking the time to understand the specifics of the SMA itself, market sources tell us.

Still, the opportunity is huge. SMAs can be hundreds of millions of dollars in size, or more; CPP Investments’ 2021 deal with Hermes GPE was worth C$1 billion ($728 million; €692 million). The amount of money held in individual mandates hard to pin down, though advisory firm and placement agent Triago estimated there was around $180 billion in so-called “shadow capital” (including directs and co-investments) in 2020 representing around one-quarter of total private markets fundraising that year.

Investors sometimes change their mind, undergo strategy shifts or need to take out their cash early. That they’re in an SMA as opposed to a commingled fund won’t affect their rationale for doing so.

Write to the authors: alex.l@pei.group and adam.l@pei.group