Why the hint of betrayal still haunts the secondaries market

While the secondaries market may for many be just a portfolio management tool, the close relationship between LPs and GPs means the stigma of selling has not gone away completely.

Pre-crisis, an insurance fund decided to sell a portfolio of stakes on the secondaries market. As recalled to Secondaries Investor, its head of private equity didn’t expect a simple spring-cleaning exercise to lead to an expletive-filled phone call from an industry grandee, furious about the optics of a blue-chip LP exiting one of its funds.

Things have come a long way since then. Partners Group said this week that it expected secondaries market volume to hit $76 billion in 2019 and $90 billion by the end of 2023, after having grown sevenfold over the past decade. Underpinning this growth is the greater acceptance of the secondaries market as a portfolio management tool.

Top-quartile funds trade hands regularly and with a high degree of efficiency. Some sell-side advisors have moved away from portfolio sales to the GP-led side, feeling that they no longer have an edge in an increasingly commoditised market. Buying and selling stakes could one day be done at the touch of a button, with no need for advisors or lawyers at all, the first in our technology series suggests.

Yet still, in parts of the market, there lingers the hint of perceived betrayal. Last week in Amsterdam, Secondaries Investor spoke to the European private equity head of a large private pension fund. While the pension had sold several portfolios of older and non-core assets over the years, it wouldn’t sell a fund from a manager with which it had a close relationship. “They gave me their best co-investments and I turn around and do that?” he said.

Part of this is about self-preservation, fear of falling down the co-investment pecking order or being frozen out of future fundraisings. In such a hot market, your allocation is never guaranteed. At the same time, it seems difficult for some LPs to separate the act of selling a fund stake with passing judgment on the GP’s investing ability.

In researching this piece, Secondaries Investor heard of numerous cases of sellers’ remorse: a European insurer that sold a small portfolio of spent venture capital stakes that has gone on to generate a 20 percent return; a tech specialist that sold a direct stake in a ‘dog’ of an app developer, which months later produced one of the most popular games ever; several LPs that in 2015 took liquidity in a tender off on a middling fund, which as of March 2019 had a multiple of 1.8x.

If you’re on good terms with a GP, perhaps considering them a friend, the urge to look past the numbers, sit tight and hope for an uptick in fortunes is strong. And in a relationship-driven business such as private equity, it may be insurmountable.

Would you think twice about selling a fund stake due to your relationship with the GP? Write to the author at rod.j@peimedia.com