On Friday, Secondaries Investor released an article (see below) highlighting the growth in the number and value of concentrated secondaries, particularly single asset restructurings, as well as the shortage of secondary funds targeting these opportunities. A key differentiator in Auldbrass Partners’ strategy is a broad and systematic sourcing initiative focused on accessing concentrated positions in high growth companies through both LP interests and GP-led opportunities, while preserving a target liquidity horizon of 3-5 years. This concentrated strategy has resulted in an estimated gross MoIC of 1.9x and an IRR of 58% through 12/31/19 for all committed deals in AP SOF II.
One of the fastest growing niches of the secondaries market is capital constrained; someone should take advantage.
Rapid developments in the secondaries market are pushing existing buyers to the limit; they also present the big players with a new product opportunity.
Growth in the number and value of GP-led secondaries processes – in particular those involving single assets – is presenting secondaries buyers with a problem: they don’t have a mandate to take on some of the biggest transactions. So said participants at a panel discussion at sister publication Private Equity International’s CFOs and COOs Forum on this week, which was held under Chatham House rules.
GP-led single-asset restructuring deals allow sponsors to hang on to promising assets beyond the original fund life and give them the time and capital to keep growing. The asset is moved into a new vehicle with new terms and reset economics, and LPs in the old fund have the option of either selling their interest to the incoming secondaries buyer or rolling over into the new vehicle.
Examples of such deals would be energy firm Lime Rock Partners moving CrownRock into a continuation vehicle with backing from HarbourVest Partners or PAI Partners moving ice cream giant Froneri into a new vehicle.
This type of deal is the fastest growing segment of the secondaries market, according to a secondaries advisor in the room.
When asked what could hamper the growth of this market, one secondaries buyer said: “First and foremost it will be capital constraint.” The same buyer noted that their own fund documents prohibit any one asset from comprising more than 5 percent of the fund. Investors in secondaries funds, the buyers said, want “diversification – not concentrated bets.”
With all conventional secondaries funds facing similar constraints, there is a natural limit to the size of a deal that can currently get done, with the ceiling being around $2 billion, according to one of the advisors in the room. At this size “it gets much harder to get those deals done without creating a market syndicate,” said the advisor.
What this means is that market won’t grow further unless – or until – new pools of capital are opened up with a mandate to take concentrated bets. “This could be another product of your secondary offering,” the advisor said.