GP led vs LP led secondaries market trend - which one is a better strategy?
Hi all, I have been a long-time lurker here. I am currently working at a large secondaries firm that does both GP and LP-led transactions. I have noticed secondaries market trends being somewhat bifurcated. We have seen established players raising single-asset dedicated funds or new market participants who are raising single-asset dedicated funds (e.g. TPG, ICG, Astorg, etc.) that are essentially leveraging their internal principal investing brands and resources. On the other hand, we are seeing many large players (e.g. Lexington, BX) who have put ~80% of their capital into diversified LP-led deals since the frenzy of the GP-led market tapered off while the LP-led market remained resilient.
Which strategy do you think would ultimately lead to a better result in the long term? I know this varies from person to person. My two cents on this would be a diversified LP-led strategy would ultimately yield a more attractive return on a risk-adjusted basis, assuming that you can diversify your sectors, vintage years, and GPs. Yes, some GP-led shops will be better at asset selection and achieve higher returns. However, on an aggregate basis, a single-asset fund strategy will underperform the LP-led strategy given the higher double layer of fees on the single-asset side (vs. LP-led side) and the lack of bandwidth and resources to do full due diligence on each investment (which I believe should ultimately be the realm of GPs). But I am curious to hear what people think.
I think a group that does both in the same fund ultimately wins for the LPs. ~30% GP leds, the rest LP. You get the diversification plus the multiple upside of the GP leds.
Sounds like you work for portfolio advisors and are trying to convince LPs to commit.
I love the anonymous posters who pop up sometimes trying to guess where other posters work with snarky responses.
Not that it should matter, but I’m pretty sure Portfolio Advisors is trying to raise a GP led only fund. So no, I don’t.
I’ve honestly seen you get this more than anyone…
GP leds feel like another means of sourcing deals, since its just looking at singular firms/a few firms for companies to add to their existing portfolio if it aligns with their given strategy. The diligence for GP led is quite similar to evaluating a possible buyout target.
LP leds feel like an actual unique asset class/investment strategy. There is a focus on consistent returns, diversification (across industry, asset class, vintages, etc.) The return profile is completely different from traditional PE.
I think from this thought, there is more specific needs LP led addresses. Also, diversification and all the other benefits of LP leds leads to strong consistent return.
I think GP leds are more popular than ever just with the current state of the market. GPs can’t raise their next fund without generating some DPI in their old funds first. Without much M&A or IPOs they’re not able to fully liquidate funds that are sometimes 10+ years old and still have a couple assets hanging around.
We do mostly direct secondaries but have made an effort this year to at least look at most of the GP led deals that come across the desk. Some terrible portfolios out there but we’ve seen some deals with highly relevant assets of a similar quality. We’ve tried not to be in a situation where we have to plug our nose on half the portfolio / treat it as worthless.
Last GP led we got done was at a serious discount to NAV with very favorable terms. Would be surprised if we got any less than a 2x on it.
I’ve often thought about this but I think the answer is both.
Volume will always tilt one way or another depending on valuation dynamics, exit environment, quality of portfolios, etc. and so therefore I think the more successful strategy is to have both capabilities. With the exception of the established players, I think the GP-led focused funds have struggled to raise capital, no? Granted, that could just be a factor of the overall fundraising environment being challenging. It also has to be hard to raise a dedicated GP-led fund when we are only just now starting to see how some of the early CVs performed. If their performance justifies the fees and truly gives you more downside protection than co-investments, then I could see them getting more traction. But, I agree with the above comment, from the perspective of an LP, I’d be more attracted to the consistency of returns in LP-leds paired with the multiple uplift from GP-leds.
Currently, I think pricing dynamics are still relatively more attractive on the LP-led side of the market so volume on GP-leds will be lower again this year (although some chunky deals have gotten done recently). But I also think GP’s are getting more realistic about valuation expectations, are growing more accepting of increasing alignment and are finally starting to understand what makes a CV work and what doesn’t… as opposed to thinking things work like it’s 2021. Asset quality seems to be improving as well so I think 2024 will see an uptick on the GP-led side, probably closer to 50/50 again.
GP led is the new fad co-invest club deal. Just allocate money to brand name GPs with a full carry roll and you won't get fired. Do some wacky LMM structured deal and some heads will roll.
Look at Manulife's fund - it's a smattering of the "best hits" of 2020-2022 as opposed to having any kind of discerning investment strategy.
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