Can anyone explain PE secondaries, in the simplest of terms?
I have a first-round interview coming up, and I still don't understand what PE secondaries are.
My understanding is PE secondaries is where a buyer purchases a primary investor's stake in a portfolio of assets, or single portfolio company.
In LP-led transactions, the LP is trying to liquidate, so the role of a PE secondaries investor is to fill the shoes of the LP. In a GP-led transaction, a PE fund might be nearing the end of its lifespan, but some portfolio companies need more time. The PE fund will transfer the company / companies to a new investment vehicle, with some LPs rolling-over and the PE secondary firm (the firm I am interviewing for) also contributing capital as an LP.
Is this understanding correct? And how does this effect modeling (e.g., how do you calculate returns as an LP?) Just want to make sure I can have a coherent conversation
following
Your understanding is correct. Modelling for LP secondaries is built on three levels (highly simplified version):
1. An estimate the exit proceeds from underlying portfolio companies, based on GP assumptions and internal assumptions. You then back the exit proceeds from the company into the fund level, along with assumptions on exit dates and timing. These exit assumptions are typically comps based, unless the LP interest is highly concentrated. You don't usually get too much info from GPs either because you'll only get a CAS, a quarterly report and maybe 1 call with the GP.
2. Aggregate all projected cash flows from underlying exits into the whole fund level. You then run it through a fund waterfall calculate distributions to you as the secondary fund, minus carry and fees paid to the GP of the LP interest you bought.
3. Calculate net returns to your own LPs based on your own fund waterfall.
For LP secondaries, modelling is a lot more high level and experienced secondaries guys can essentially get a quick sense of if a deal works out or not basically in their heads with quick mental math. The edge in LP secondary investing comes from information (do you have more info on underlying company performance?), access (are you whitelisted for LP transfers? Are the GPs high performing and access constrained?), and pricing (can you negotiate a strong discount?).
For GP-leds, particularly for single-asset deals, it would be LBO modelling similar to a buyout deal, but the GP still manages the asset so in some ways it is similar to co-investing in that you dont exactly lead the other DD processes. You would then negotiate terms like fees, carry and carry step-ups, exit rights, pricing, and so on. Arguably a different skillset from LP secondaries investing, given that direct buyout experience would be very helpful for GP-leds more so than LP deals.
Vel unde tempora beatae officiis asperiores laboriosam aut. Sint eum voluptates id labore vel. Rerum quam et sequi unde.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...