As the secondary market continues to grow and evolve, it has become increasingly segmented. Real Estate, Infrastructure, and Venture secondaries now account for 12%, 8%, and 7% of 2016 transaction volume1, respectively. In addition, and among core private equity strategies (64% of 2016 transaction volume1), complex deals like structured secondaries have become increasingly prevalent and comprised approximately 25% of 2016 secondary transaction volume2. Driven by GPs increasingly utilizing creative liquidity solutions, these deals have the potential to result in a “win, win, win” to LPs, GPs, and secondary buyers3, but only for the participants with the specialized skill set and experience required to execute these transactions.
We believe the market for structured secondaries will continue to grow as the number of mature private equity funds continue to increase. This growth is driven by (i) a large number of pre-crisis private equity funds entering into extension periods and (ii) holding periods for portfolio companies lengthening. GPs are increasingly seeking creative liquidity solutions for their LPs in these maturing funds, and, importantly, the quality of general partners seeking a structured solution has improved dramatically. Inherent adverse selection has been reduced with improved GP quality, and the segment is no-longer considered to only contain “zombie or sunset funds”, potentially creating a more compelling opportunity for buyers.
Structured properly with strong alignment for all parties, these transactions could potentially provide solutions for all parties involved. Fatigued LPs welcome the opportunity for liquidity, especially for those that have been in a fund for potentially a decade or longer. GPs can potentially reset fees and carried interest, maintain its team, and drive alignment with buyers. Lastly, this type of transaction can present an opportunity to a secondary buyer to purchase the assets at a fair price in a less crowded part of the vast global secondaries market. These transactions can often generate early distributions and valuation uplift, with early visibility of attractive risk-adjusted returns4.
In our experience, participants need to have a deep GP network and rounded team capabilities across origination, due diligence, negotiation, pricing, structuring, asset underwriting and execution to be able to complete these types of structured secondaries transactions. In particular, direct investment competencies and an ability to dig into the underlying companies are essential, given often higher degrees of portfolio concentration.
Driven by the increased amount of unrealized value in maturing private equity funds, the growth in creative GP liquidity solutions has provided an attractive opportunity for secondary market participants. We expect buyers with the competencies required could see more attractive opportunities as this segment of the market continues to grow.
1 Source: Evercore, 2016 Secondary Market Survey Results.
2 Pantheon Opinion, based on estimates from three secondary market intermediaries, as of January 2017.
3 Source: PEI Secondaries Roundtable, May 2015.
4 Pantheon Opinion. There is no guarantee of early distributions, uplift of attractive risk adjusted returns.”
Written by the Pantheon Secondaries Team, Rudy Scarpa, Partner and Alexander Laird, Associate, based in Pantheon’s New York office.