Pondering performance

We are seeing strong demand for liquidity from the fund investor community, which is driving GPs to use the secondaries market more and more to generate liquidity options, in part also to facilitate new fundraising activity. What is particularly interesting in the current environment is that the quality of deals that we see is – on average – a lot higher than was the case two or three years ago.

Meanwhile, my perception is that only the highest quality opportunities are getting across the line. There seems to be a real bifurcation in the market. Those high-quality transactions are attracting a great deal of attention and capital, while transactions where either the GP or the underlying asset(s) have an issue, are a lot harder to get done.

Regardless of whether it is a single- or multi-asset GP-led secondaries transaction or a co-investment deal, we want to see a credible path to long-term operational value creation, along with good alignment of interest between ourselves, the fund manager and the management team of the underlying portfolio companies, at a reasonable entry valuation.

As far as the underlying assets are concerned, we have an affinity for certain sectors and business models. For example, a company in an industry that is very capex intensive is probably not for us, whereas tech-enabled business models with recurring revenues in certain sectors are going to be of interest.

In addition, we are looking for a focus on operational value creation that is a good fit with the GP’s track record and for the underlying companies and sectors. Finally, and maybe most importantly, we want to see strong alignment of interest between all parties.

For us, the more of their own money a fund manager puts at risk alongside us, the stronger the positive signal that is sending us. At the moment, we are seeing fund managers contribute significant amounts of their own capital – often 5 percent or more – to GP-led transactions, which we view as a strong indicator of conviction and alignment of incentives.

For example, we invested in one GP-led secondaries transaction recently where the GP rolled over all proceeds, injected significant new money out-of-pocket into the deal alongside us, with successor funds also coming into the deal.

Ultimately, the GP accounted for more than 10 percent of the continuation vehicle. It is that type of conviction that we really like to see.

When we set up our transactions business, we had a discussion about what types of investment opportunities we would define as co-investment and what we consider to be a secondaries transaction. We took the view that any deal where a GP is adding a new asset to its portfolio and then offering a piece of that to their LP base is a co-investment. If you take that approach, it is pretty clear where the line is.

In answer to your second question, I do not buy into the argument that a GP-led is really just a co-investment with fees and carry attached because the dynamics are so different. In many cases, with a GP-led secondaries deal, the GP has spent a significant period of time working with the underlying portfolio company, identifying and resolving any problems that may have been the reason to invest in the first place and laying the foundations for growth. You do not get that dynamic with a typical co-investment.

Furthermore, I would argue that the alignment is greater in the GP-led space because of the significant investment that sponsors typically make.

The amount of their own capital that GPs put into a deal alongside co-investors is simply not as great as those at risk in a continuation vehicle.