Q&A: PE Secondaries Principal

Hi there,

I wanted to host a Q&A to see if I can be helpful to anyone. A bit about me:

-Non-Target Undergrad (no MBA)

-4 years I.B.

-5 years in PE secondaries, promoted 1 year ago to Principal

-Active in all types of deals (Vanilla LP, tail-end, Late Primary, GP-led, Credit, Pref. Equity, Real Assets, Directs & Control, Distressed)

Hopefully I can be helpful.

 

Hi there!

Thanks for your questions.

Naturally this is quite subjective but I'll provide you with my opinions, based on my personal interactions with the groups and some data points I've found over the years.

From a cultural perspective, I think Whitehorse is building a very respectable shop. Their staff are treated well and generally the people working there are quite pleasant and seem energized about the work they do. From a return perspective I think the actual implementation of their strategy leaves something to be desired, but time will tell.

From a purely compensation perspective, Goldman Sachs and Blackstone both pay exceptionally well. Where as the likes of HarbourVest and Hamilton Lane certainly do not.

Groups that I think are doing something really interesting and have exceptional returns:

1. Neuberger Berman - really smart group of people. Focus is on GP led transactions. Returns have been extremely strong. Seems to avoid a lot of the over-saturated GP-leds at the top end of the market.

2. Sweetwater - focus is on single asset direct deals. Returns have also been really strong (25%+ and 3x+ Multiples). Strategy is a bit more high-octane than 'standard' secondaries.

3. Overbay - More of an index strategy but returns seem to be very strong. Worked with a few of their principals and they're sharp.

4. Knightsbridge - Really smart VC buyer, really understands the market.

5. Multiplicity - More of a HF but do really interesting deals and are incredibly smart.

6. Banner Ridge - Similar to Multiplicity but focus is just on distressed.

7. Late addition - I forgot to mention that Hollyport is killing it!

 

Hi! Thank you for taking the time to answer questions. I was wondering if you would be able to expand on Overbay Capital? Realizing there isn't a lot of discussion on WSO regarding this firm and wanted to see if you could expand on what you mean by 'index strategy' - Thanks!

 

Speaking to one of the smaller firms on the list and would be grateful for your thoughts. Can't find a way to DM you - do you know how best I could reach out (or if it's not too much to ask, could I trouble you to DM me)? 

Thanks a lot for the thread - this is probably the best discussion out there on the sector. 

 

Questions:
1. Since secondaries are not talked about as much on this forum can you go into more detail about those deal types you mentioned? Specifically, what the differences are (e.g. "Vanilla LP" vs. "GP Led" vs. "tail end").
2. Please comment on the differences in the analysis between secondaries and regular PE/DL.

3. Typical Junior comp at a place like yours?

 
Most Helpful

Hi there!

Thanks for your questions.

Question 1:

Below is how I try and segment the market. Various groups will focus on maybe 1-3 of these deal-types, while a few of the mega-funds (Blackstone and Goldman) will do them all (to varying degrees of success!)

1. Vanilla LP: You are buying single/multiple LP stakes in a fund(s). Transactions are typically between the buyer (PE secondaries firm) and the seller (holder of the LP stake) - the GP is generally not involved in the transfer. This is 'traditional' secondaries investing and relatively 'passive'.

2. GP-led investing: This is a catch-all phrase but really captures a variety of 'liquidity mechanisms' which have been around for years. The focus is for the buyer (PE secondaries firm) to engage directly with the GP to craft a liquidity solution which meets both the manager's needs and that of their LPs. When COVID-19 hit, traditional 'vanilla' LP stakes became impossible to buy due to the valuation lag. As such, a variety of firms started concentrating solely on GP-led deals so they could have better access to information. Below are a few 'sub-strategies' for GP-led investing:

2a. Continuation Fund: The GP's fund is near the end of its life and the GP needs more 'runway' to manage the assets out. The GP either lifts out single assets (the 'carve-out') (or all of the assets) into a 'Continuation Fund' with a longer term. Typically existing LPs are given the option to cash out (often at or around a price of par) or can go into the new vehicle without charge. Often GPs economics are reset and carry may or may not be crystallized. A variety of firms now specialize in carving out prized single assets from even newer funds so GPs can gain more time and $$ through a continuation vehicle. The jury is out on the ethical parameters of some of these younger funds doing this. Firms like Timber Bay have built concentrated single-asset secondary funds comprised of ~10-12 deals, each with a single company.

2b. Tender: Similar to the Continuation Fund but more passive in nature. LPs are given the option by the GP to sell their stake to a replacement buyer or continue in the fund status-quo. The term may be moderately extended, or not at all. This is less labor intensive and invasive than the Continuation Fund. Often the secondary buyer will provide a 'staple' (i.e. primary commitment to the GPs newer fund) to entice the GP to go ahead with the Tender in the first place. Once again, jury is out on the ethics of this but it is more passive in nature than the continuation fund.
 

2c. Fund Restructuring: A combination of a Tender, Staple, and Continuation Fund. The focus is on there being a mismatch and a new liquidity provider (i.e. secondary market buyer) trying to solve a problem for the GP. Often this could be a variety of portfolio companies needing more dry powder (but being outside of the investment period). Often there is either a full or partial carve out of assets, an injection of dry-powder, and potentially a change in strategy/parameters for the restructured fund.

For all GP-led deals, they really have been around for ages, but more secondary market buyers are getting into this area for a variety of reasons: (a) potential for higher MOICs (low case 2x net and 20% net IRR) through more concentration, (b) better access to information as you have a direct dialogue with the GP, (c) you avoid buying into a fund which then potentially liquidates (without your input) soon after buying. Naturally the negatives are that the fees are substantially higher, the quality of some of these remaining businesses can be questionable, more concentration, they typically do not cash-flow until exit - so for investors that like a steady stream of cashflows this isn't the best bet.

3. Preferred Equity: Providing liquidity solutions to holders of LP stakes in funds or directly to Fund-GPs. I personally don't like this strategy as you're often capping your upside where as you could just buy a similar asset at a discount and have the same effective risk profile (from an LTV perspective).

4. Credit/Infra/Real Asset Secondaries: Buying passive LP stakes in these strategies

5. Tail-end: Buying LP stakes in older funds. I've seen some groups recently buy assets in 1999-2000 vintage funds (yes, they're still around!) Today 'tail-end' means 10 years or older but I think that's ridiculous as the GFC pushed out the exit for all 2007-2010 vintage funds, so I usually consider tail-end to be more around 12+ years.

6. Distressed: You're often utilizing pref. equity or buying LP stakes for extremely low prices. A lot of these assets are low quality and have serious issues - like full write-off potential. Other situations may be direct investments or buying escrows/legal claims. The focus is on either buying into a distressed situation/seller or distressed asset/GP.

There are other 'strategies' such as late primaries, and various credit strategies such as providing NAV loans but they don't form a very large part of the market.

Question 2:

It really comes down to the quality/quantity of information provided. GP-led transactions will be analyzed similarly to any LBO/direct-PE deal as you have access to the GP and often confidential info that they don't give out to LPs. Passive 'vanilla' LP transactions use a variety of methods, but it's more macro driven and top-down in valuation - i.e., fund benchmarking, manager analysis, single company comps (if you have the data!) etc.

Question 3:

We pay junior staff very well (in my view). Analyst base is usually around 100 and bonus is usually ~50%. Associate comp is usually around 150-180 with ~75-100% bonus allocation.

 
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What sort of modeling do you do in your deal analysis?

Did you find your IB background helpful in the transition?

How well do you feel like you know fund level structures and whatnot since doing this job?

Hardest part of job?

Favorite part of job?

Least favorite part of job?

Whats up with Sameer Shamsi? Is he a prick? Or a sore loser?

Who would you consider the biggest and best known rainmaker in secondary advisory? Nigel Dawn?

 

Hi there!

Thanks for your questions.

What sort of modeling do you do in your deal analysis?

My firm does 'all' of the secondary strategies out there so there isn't a single way to value an asset. Rather it completely depends on the situation. If it is a GP-led deal then there will often be an LBO model provided and then our analysts will often plug their raw data into our proprietary model. More diversified vanilla LP deals go into our proprietary model which is more macro/top-down and has a variety of sensitivities - the focus is really on the economy and how that may impact exit timing of funds as well as growth. Benchmarking is a large component here but when we drill down to individual companies we do comps - more granular quantitative analysis often isn't do-able as a lot of fund reporting doesn't provide enough company-level metrics.

Did you find your IB background helpful in the transition?

To a degree, yes. It was helpful to understand basic 'institutional' things like modeling and deck preparation, but secondaries really is an animal on its own. I was amazed at how important it is to understand a deal QUICKLY to see if it passes an initial smell test - this takes time, experience, and really strong understanding of back-of-the-envelope math (to be entirely candid!)

How well do you feel like you know fund level structures and whatnot since doing this job?

I feel very strong in this area. It's been an amazing journey and I've learned a lot (and continue to!)

Hardest part of job?

It takes a while to navigate the market and understand who the players are. You can waste a lot of time dealing with certain intermediaries that pitch deals and make you spend time on DD all for it to not be 'real' - it can be frustrating.

Favorite part of job?

Finding small, unique, proprietary, and complex transactions!

Least favorite part of job?

Raising money. It's tiring and feels like a never ending cycle of repetition. 

Whats up with Sameer Shamsi? Is he a prick? Or a sore loser?

I wouldn't know - I've personally never met him or dealt with him.

Who would you consider the biggest and best known rainmaker in secondary advisory? Nigel Dawn?

This is a really hard, and interesting question. While our relationships with intermediaries is important, we really focus on proprietary situations as our bread and butter. Nigel is fantastic, though!

 

Can you elaborate a bit on the modeling work you do in your role, particularly on the GP-leds side?

I've seen some of these massive (I truly mean massive, but so unnecessary?) PE secondaries models from the sell-side building fund water falls that are supposed to apparently match how the GP's LPA fund distribution is written. Is this something your shop builds as well? To essentially calculate gross and net IRR and MOIC?

 

This is a great question. I often give 'gut check' like questions to final round candidates to assess their level of familiarity with the asset class. You often can't be expected to get it 'right' but it helps me understand where someone is at.

1. Can you tell me: (a) what is the closing cost for the buyer of the below transaction and (b) what the ballmark MOIC would be at closing and at the end of the deal's life? I try and get them to answer within about 20-30 seconds.

-Record Date NAV: $100

-Price: 80%

-Post Record Date Distributions: $10

-Post Record Date Contributions: $5

-Total Asset Growth on Record Date NAV to End of Deal: 10%

2.  I will often describe a relatively high-level macro-valued deal and have them walk through their understanding of it and if they think it is worth digging into/pursuing from an investment perspective. We often discuss various points of DD one may want to consider based on the given situation.

As you can tell, it's very industry specific. Our analysts will be able to answer the first question within a week and will never forget it after that but it takes time to get into the mindset so we all speak the same 'language'.

 

Thanks! Adding an additional question - what's your recommendation for a person new to PE Secondaries in how to go about developing the skill of doing "back of the envelope math analysis" to gauge if an investment is worth investing in? 

 

Sure. There are a variety of ways to go here...

Distress can be a catch-all, and more often than not means special situation or a (deep) value-based approach to investing. The key for us is looking for situations which are as uncorrelated to the market as we can find them,  and looking for small deals/unique situations where we can negotiate extreme discounts. I don't work for Multiplicity but they buy stakes in litigation finance projects/funds - that's brilliant. Not something we do, but shows you can find situations that have zero correlation to public equities.

For my firm, we are looking at single assets backed by mediocre to good quality sponsors which are in trouble. There is often a mistmatch at the fund-level which requires a restructuring and adjustment to the capital structure. The difference between us and an Oaktree is that we don't take over control of the asset and insert ourselves as an operator - we are rather just uncovering situations and acting as a partner. In a few instances we have bought out GPs who have done terrible jobs managing assets and replaced teams, but I still wouldn't see it was direct-pe/distressed-like investing - still relatively passive.

 

Each firm really is different - I know some principals getting paid like IB associates and others making MF LBO-level comp. Smaller firms will allow you to negotiate. My base is around $375k. I've routinely made around 75-125% in additional annual bonuses and my current carry is worth around $4m and quite solid. So for total cash comp I'm making around ~$800k per year and if we raise a fund every 2-3 years I'll probably get 4-7m in carry out of each one.

 

Hi there!

I was mentioning in another post above that it certainly can be tiresome dealing with 'BS' intermediaries that pitch deals which don't have a hope of going through.

I certainly would advise juniors to move directly into this area for a variety of reasons:

1. The sector is booming - lots of opportunities.

2. We aren't as picky regarding education and where you came from prior to - just look at Ardian's team...A lot of them were just interns out of their undergrad.

3. The hours aren't THAT bad and the pay is pretty decent.

4. I personally find the work interesting as there are just so many different types of deals to analyze.
 

 

At our shop we typically hire associates who have 2 years of investment banking experience or a senior associate that has had a mixture of traditional IB and maybe a year or so of secondary advisory from a Lazard or PJT etc. You really do not need an MBA for this field.

Honestly, I've seen a real mix of backgrounds at both the junior, mid, and senior level at firms. Ardian hires people right out of their undergrad with virtually no experience beyond an internship. Some firms hire people with a audit/accounting backgrounds, others go for M&A advisory, corp. dev, consulting, IB - it's a mixed bag. There certainly aren't as many barriers to entry like a standard LBO PE fund. All we look for is some kind of 'transactional experience'.

 

Hey - thank you for doing this! Couple questions if that's okay:

1) To follow up on the above, are their particular traditional IB groups that are well-favoured? I'm in a sponsors coverage group and interested in the space.

2) Who in your opinion are the best and/or most interesting secondaries players in the London/Europe markets (if you happen to know)?

Cheers!

 

I don't think very highly of them to be brutally honest. Whitehorse has taken all of the senior talent and since Woolhouse left they have made some very highly questionable appointments and promotions amongst the senior ranks.

Further, they have billions of dollars at their disposal yet they've been a "net-seller" of assets for years. They don't source any deals and don't even participate in processes as a lead - they simply review a plethora of co-investments from brand name / blue-chip sponsors.

 

Hi man,

I see you're a Private Equity Secondaries Principal/Director, I have an upcoming interview for an Investment Associate role at a PE Secondaries firm, which primarily focuses on tail-end secondary transactions/liquidity solutions, similar to Whitehorse etc. How would you best suggest I prepare? What interview questions would I be asked? What will the 2 hour case study be comprised of?

 

Good afternoon, thanks for doing this Q&A. Can you shed some light as to the different process/any nuances with credit secondaries? What are you focusing more of your analysis on here? Any advice for someone looking to recruit into credit secondaries from a liquid credit team? Cheers.

 

Great question. This area is not my forte - we have team members who specialize solely in this area. What I will say is that we routinely do the same types of deals (and run up against) non-secondary firms that specializes in: direct lending, mezzanine finance, nav loans, senior debt, pref. equity - we think of distress as a completely different asset class. The difference between us and a regular credit fund is that we really just back sponsors - we take no control of the assets or have any real stake - it's a passive investment. Sorry I couldn't be more helpful.

 

Current undergrad (junior) here. Interned at an E&F this past summer, which is where I got exposed to the secondaries business (stepstone, harbourvest, etc.). What do hours look like at the junior level, and what advice would you have for recruiting out of undergrad? Did you consider things like PE/GE/VC/HF/Corporate out of IB? I also heard "secondaries can be a career ender in a good way," so would also appreciate your thoughts there. Thanks!

 

Hi there,

On the high end I'd suggest around 70 hours/week. On the low end around 45-50. I think the standard would be around 55-60 hours for a junior. I work longer hours than my staff, not because I have to, but because I want to.

We consider all backgrounds, as long as there is some kind of transactional experience or understanding. 2 years of IB would be the most natural way into an associate role but there are other routes to get there, too.

Not sure on the 'career ender' comment - I firmly believe you are your own master of your future. Don't let anyone feed you BS about what you can/can't do.

Recruiters - I'm not that tapped into analyst level recruiting, unfortunately! Sorry!

 

As soon as we "greenlight" a deal for DD all of the public and soon to IPO assets are put on a restricted list. No secondaries staff will be allowed to buy shares/additional shares.

Staff are also not allowed to try and do side deals by buying private markets assets directly - our focus is on our fund (and in turn our LPs) gaining exposure.

 

From Associate to VP it became more about: asset/deal selection, managing teams/processes, deal negotiation.

From VP to Principal it became more about: fundraising, relationship management, corp. dev., reviewing deals from a distance and providing advice

I imagine the more senior I go the less I will be involved with day to day deals and more it will become about being an ambassador for the firm's image with media, corp. dev. activities, fundraising.

To be honest with you, I think VP was the most enjoyable 'sweet spot' for me, granted I always had good principals/MDs above me that gave me a fairly long leash to prove myself.