On November, SuperInvestor is getting a new home in Monaco. This will provide the space for even more private market professionals to gather, and share crucial updates on the industry, establishing connections to take their business further and develop the future of finance. In the coming months we will be shining the spotlight on some of the key LPs and GPs joining us at The Grimaldi Forum, to share exclusive insight on their investment strategies and key developments in the market.
For the very first edition, we're speaking to Thomas Hallinger, Managing Director at Golding Capital Partners, about investing in the secondary market, what challenges he's met along the way and what makes him join his peers at SuperInvestor.
What’s your investment strategy?
Golding Capital Partners is an independent asset manager for alternative investments, managing around €14bn AuM across private equity, private credit, infrastructure equity and impact investments on behalf of a trusted group of more than 200 international institutional investors. We are active across primaries, secondaries and co-investments.
As for our private equity secondary strategy, we are focused on the smaller end of the market, investing in both select LP and GP-led transaction opportunities in Europe and North America. High-quality and fast-growing trophy assets are a natural fit for us and a segment in which we can best leverage the Golding platform and relationships built with the sponsor universe over the past 20+ years.
We are always on the lookout for carefully curated deals, high alignment with institutional-quality GPs and assets that are poised to grow in robust segments driven by secular, lasting trends irrespective of where markets, rates or else are in their respective cycle. Quite naturally, tail-end transactions, fund restructurings or, in our view, overly diversified portfolios – which tend to come with a longer tail of risks – are not for us. While specialized players can certainly find good opportunities in those segments, we prefer the ‘boring’ yet highly attractive risk-adjusted returns of quality exposures and our investors certainly agree with us, appreciating the fact that have never lost a Euro on any of our secondary transactions.
You’re specifically focused on the secondary market. What are the most interesting developments you’re seeing in this area right now and how are you expecting it to develop over the course of the next 1-3 years?
The secondary market is an interesting market to be active in. I started out in this industry in the aftermath of the GFC and I feel it has always been fast-paced, intense and great fun to be part of this growing ecosystem.
When looking back in time, the overall development of the market over the past 15 years has been quite steady – if you adjust for the pandemic-related summer break in 2020 – and healthy in my opinion, from the low $20bn to more than $100bn of completed market volume for three consecutive years now. As the market grew, new tools and solutions were developed – I remember working on a GP-led transaction in 2013, but we had no fancy name for it yet – and more capital was raised, which could help digest larger volumes. The pandemic certainly played a large role in that, too … while we had the technology of continuation vehicles before, for example, it needed the elevated uncertainty and gap of buyer and seller expectations to illustrate the benefits of a solution that, at its core, is flexible and can be curated, entails superior information exchange and provides alignment of parties involved. If done right, those ingredients make for a great solution that caters to the needs of all stakeholders involved and gets deals done reliably.
Going forward, I am convinced we will see more of the same, but higher, faster and more nuanced.
As for sellers, the pent-up desire for liquidity won’t magically disappear just because M&A seems to pick-up and more exits are getting done compared to recent quarters. Investors have committed larger and larger amounts to private markets over the past decade and recent vintage funds are clearly lagging behind in terms of DPI … fertile grounds for us liquidity providers and, hence I am convinced that the secondary market is poised to growth further. Reaching the next frontier, $200bn of transacted volume, is less a question of if, but when.
As for sponsors, sentiment has changed drastically in recent years. A decade ago, we secondary professionals were ‘tolerated’ – I am exaggerating of course – at annual meetings. Some more, some less … depending on your ability to do staples or have primary pockets on the platform. Only a few years ago, we still fought an uphill battle trying to get meetings to explain to GPs the intricate workings and potential benefits of a GP-led transaction. But only in recent quarters, the pendulum has swung in the other direction and sponsors are not just open, but are actively seeking dialogue to discuss transaction ideas with firms like us and advisors – who, by the way, do fantastic work to curtail creative exuberance and craft a steady flow of transaction opportunities that in terms of professionalism and deal execution more and more match traditional M&A markets. Three years from now, I expect a further proliferation of the GP-led segment. Driven by innovation and additional entrants and capital, the segment will finally be able to transact not just trophy assets, but will also find innovative solutions for the ‘other’ exposures that can equally benefit from tailored solutions and more time and capital.
As for buyers, I am entirely convinced we as a market will continue to drive innovation. New entrants are coming in every year, and we are going to see even more specialization among firms – whether that is large portfolios, concentrated exposures, GP stakes, lending solutions, tail-end specialists, or firms targeting other segments like infrastructure or venture secondaries. AI technology will support us in making faster and better decisions. And I expect the market to finally be able to raise more capital as younger segments like GP-leds mature, and track records on paper become real DPI, cementing not just the relative risk-adjusted attractiveness of the segment, but also the outstanding returns that can be made.
These are undoubtedly exciting times to be in our market and I can only recommend a career in the secondary market.
What are the biggest challenges you’ve had to overcome?
Challenges have essentially been threefold over the past few quarters: heightened market volatility and related valuation ambiguity, macroeconomic concerns as well as talent attraction and retention.
Navigating volatile markets and asset valuations have been significant challenges. Not in a traditional way, because uncertainty almost always creates fantastic opportunities for experienced secondary buyers, but for simple reasons like the widening discrepancy between buyer and seller expectations … after all, no transaction gets consummated, unless buyer and seller agree on a price. Luckily, the secondary market has plenty of innovative solutions – such as earn-outs or deferrals – to mitigate and close potential pricing gaps. What innovation of course can’t cure, is the persistent undercapitalization of the secondary market. Taking into account the cumulative firepower of our industry, we are – despite strong fundraisings in recent years – still ‘only’ able to digest about one to two years of market volume. For comparison, firepower in traditional segments such as private equity typically approximates around four years of transaction volume. While this enables us to be picky in our deal selection and implicitly creates a very favorable pricing dynamic for buyers, it in turn creates friction, again and ultimately prevents quite a few ‘doable’ opportunities in today’s market from getting transacted.
Next, macroeconomic concerns, such as cost inflation and rising interest rates, have been a persistent challenge, impacting profitability, cash generation of assets and ultimately value creation within portfolios. But crises and cycles have always been there. The critical element to mitigate risks and to secure attractive returns is and will remain rigorous due diligence processes, high selectivity and the construction of a diversified portfolio of quality assets in growing sectors. And healthier capital structures in our segment targeting small and midmarket exposures certainly also help to maneuver the unforeseen.
And lastly: talent. Our market has certainly emerged from the shadows, but we need to attract more talent to our industry so we can grow, raise larger funds and execute on the vast opportunities present in today’s and tomorrow’s market.
What are the most important factors for LPs looking for a manager within secondaries?
There’s a couple of obvious things to due diligence: historic track record, sourcing and execution capabilities, and in-depth market knowledge and expertise. Transparency, robust governance, risk management and alignment of interests are certainly important as well. And make sure to screen the entire platform – for example, we benefit tremendously from the wider platform and primary capabilities of Golding. Not only can we leverage data and existing relationships, but we are oftentimes a preferred partner in access-restricted and highly sought-after transaction opportunities.
What is tougher to due diligence in secondaries is the actual risks taken. So, make sure to go through individual deals and ask for underwriting assumptions made. Diversification in itself might make for solid market returns, but only if bought at the right price. Try to understand fund mechanics to know what you are getting yourself into – for example, we do not apply any additional leverage to our transactions because we think this adds unnecessary risks and ultimately is dilutive not just to returns, but also prohibits us from sending cash back early to our investors.
And above all: we are in a business of trust and it’s long-term in nature. Make sure to know the individuals and what’s driving them … after all you’re gonna be in a closed-end relationship for several years.
As an LP and a GP, why are you choosing to attend SuperInvestor this year? How does it support you in your success?
It’s very simple: I’ve attended several times before and always appreciated the well-curated event and agenda. As an attendant and panelist, I certainly appreciate all the hard work and efforts that you put into making the conference a really pleasant and tremendously efficient way to catch up with existing relationships, investors, peers and other experts, while seamlessly forging new relationships and sourcing new opportunities.
See you in Monaco in November?