Giving secondaries a second thought

Subtitle

Why the growing PE Secondaries market could be the career opportunity you didn’t know existed

Secondaries

Jane Richards

Once viewed as somewhat niche, the secondaries market has become one the fastest growing segments in private equity over recent years.  Not only have fundraisings and deal volumes continued to grow, but the nature of deals is changing too, specifically the increase in GP- led single asset transactions.  This has subsequently led not only to an increase in the number of players on the buy-and sell-side, but an evolution of the skillsets required to forge a career in this segment of the now firmly established secondaries market. 

If you’re considering a move to the buy-side or the next step in your career, read on to see if joining a secondaries fund could be the right career path for you.

An evolving market

We asked a secondaries investment professional how they have seen the market evolve and how this affects the skill set required by investment professionals.  “The broker community is educating the market, the market is growing and the stigma around the secondaries market has gone.  Most deals between 2010 and 2017, were not called GP leds at the time, they were called fund restructurings.  Typically, the candidate for secondary transactions was a fund (a GP) struggling to exit assets or a fund that was out of its investment life (so funds that were in their 10th,11th, 12th year) but which still had meaningful assets remaining and requiring some kind of solution for the LPs. 

“The broker community is educating the market, the market is growing and the stigma around the secondaries market has gone"

It always had that restructuring element to it but over time, as people understood how to use this technology, you had more blue-chip GPs come to the market.  Around 2018/19 we also saw single assets coming to the secondary market. The thesis there was: "We know this investment, we know this management, we’ve spent all this time and effort, why would we let this asset go to the next sponsor for them to realise the next wave or return, why can’t we keep this asset?"  So, they brought their ‘greatest hits’ if you will to the market, they created these continuation vehicles, reset the economics, provided LPs the optionality to realise some liquidity or roll their exposure into the new continuation vehicle. That’s pretty attractive to sponsors and they continue to pay a lot more attention to that.  Probably about 50% of the top 50 sponsors have utilised the secondaries market and I would imagine now 100% of them are aware of what’s going on and within the next 3-5 years, most of them will have utilised it in some shape or form.”

The question is, what does this do for the secondaries’ buyers?  In short, the industry is benefiting from diversification.  When an investment is made in the LPs stakes of a business, existing positions in funds are bought, nothing is being restructured, it’s simply a case of replacing one LP with another coming into the fund.  Even on the GP-led side, where deals involved multi-assets, there are now increasing deals involving single assets – we are often seeing between $200 to $500 million being put into a single company.  When that much is bought in concentration, the skill sets you need to have, are a little different.

What do candidates need to succeed?

The skillsets are changing, and this therefore has implications for professionals looking to forge a career in the secondaries market.  One seasoned secondaries investor told us: “To succeed, you need to be able to talk the language of the buy-out world, the sponsor world, have really good modelling skills, strong investment judgement, the ability to do diligence and an industry value creation business plan. 

"The skillsets are changing..."

Really be a master at valuation and be able to structure these deals.  The sponsors are really pushing the market to adopt M&A technology because currently it still utilises the secondary elements.  These funds are priced quarterly, they report quarterly and we still price a reference date.  They want an M&A technology where the EBIDTA that we price is a pro-forma EBITDA.”

It’s clear that we’re already seeing more investment banking talent move into secondaries and this is likely to be just the beginning of the shift.  Once more GPs establish their secondaries arm and start doing more buy out style deals, it’s likely we’ll see more top-ranked investment banking talent flow into secondaries.

What are the upsides (and downsides) of a career in secondaries?

Secondaries isn’t for everyone, it’s about trade-offs.  It’s not the full value chain of private equity. Secondaries funds value and execute.  They are passive investors, not active board members and don’t take a view on the exit.  If you want to be involved in the management of the business and become a board member as well as oversee it and run the exit, then this is not for you.

"Secondaries isn’t for everyone, it’s about trade-offs"

On the flip side, you will get to focus on what really matters so you’re not going to spend a week doing diligence on the working capital for example, but you’re going to ask more high-level key questions such as: "Are we buying this business at the right valuation, can the sponsor really add value here, how has this asset performed under their ownership, is the go forward value creation similar to the historical value creation?  Can we really buy in to the story?"

You’ll also get to work on a lot more transactions, often look across asset classes – venture, growth, buyout - and be able to get to know a lot more companies, a lot more assets, a lot more industries.  It’s also a hugely growing market.  At a secondaries fund you will build relationships and talk with many sponsors, you’ll get to see how they analyse and monitor their companies which can be really interesting.  Whilst the hours can still be long, it’s often an easier lifestyle than a buyout fund. 

What’s next for secondaries

We asked an investment professional at one of the leading secondaries funds about the changes they had seen and why the secondaries market has become increasing important.  “I joined in 2017, it wasn’t that long ago, and the market back then was around $50-60bn, now it is double that.  And I think the most important change was not just the size and the volume of deals, but the nature of the deals and the number of participants on the buy and sell-side as well as the advisory community.

The share of continuation vehicle exits accounts for almost 10% of all sponsor exit activity, now higher because of the lack of exits in the market, and secondaries has become a very credible exit path that delivers something additional for the sponsors.  They are not just selling an asset and realising the proceeds, but they get to keep the asset, reinvest in the asset, increase their AUM and potentially generate more fees and carry down the line. 

"I think the most important change was not just the size and the volume of deals, but the nature of the deals and the number of participants on the buy and sell-side as well as the advisory community."

So, it’s an additional benefit for them and many project this to become 20% of the market in 3-5 years.  There are also people who are projecting the buy-side to become more specialised, for example sector specific funds.”

The private equity industry is much broader than the obvious private equity houses and it’s always worth thinking outside the box around other firms and roles, including secondaries.