Secondaries Modeling
I’m curious since I haven’t really seen much of this on here. What kind of models are being done at PE secondaries firms? I heard top tier shops are very modeling heavy, but lower tier not as much.
I can’t tell you the amount of times I’ve tried to get a secondaries model from this forum. If anyone has one (an actual model) please message me. Willing to trade.
LP secondary models are highly proprietary which is why you won’t see one. Case studies would be more back of the envelope and similar to traditional interview processes
That makes sense. Is there no way to sanitize the models at all though?
The best thing to do is just build one yourself. There should be three models (or levels) which are generally different tabs. One is the company level which is just like any other mini model LBO for a company. I think most secondary firms case studies really are just testing this portion, by the way, because they want to know how you think about companies and they can teach you the fund modeling part much more easily than they can to think about a company. Anyways, the second layer is the fund model, which is just modeling the management fees and carry for the fund and the cashflows for all of the companies in the fund. This will basically link to all of the mini model LBOs for the companies. Then, the third layer is a “deal” model that aggregates all the cash flows from the fund models. Like another poster said, it would be pretty easy to tell which firm a model came from if you worked there because there are so many different ways to setup the models, but all of them will basically have the components I just mentioned.
Never worked in secondaries before and would appreciate if you could clarify why secondary funds need "mini LBOs" for companies. My understanding is that the secondary funds acquire a stake in LP assets that are composed of different company/assets and thus the only leveraged part would be to borrow and acquire the whole stake. Do you mean allocating the leveraged portion to different companies depending on their size/assets/cash flow contribution? Otherwise I was imaging a DCF/3 statement SOTP style valuation for the acquired stake.
Can provide you with a waterfall template.
Can you dm me?
Please can you dm me the waterfall template?
Hi could you send over the model to me as well? Thanks!
hi! could I also get your waterfall template?
Can I have the template as well? Thanks so much!
Can you please share the waterfall template? Thanks!
Can you dm me? Thanks very much in advance.
Hi there - if you could DM me with your waterfall template - that would be incredibly helpful. Thank you so much for your help!
Could you please DM the model too? Thanks!
Could you please DM me too?
Hi! I would appreciate a waterfall template as well! Thank you in advance.
Can you please dm me? thanks!
Could you DM me the waterfall as well?
a year late but could you share with me too pls!!
Can you also send me the waterfall template?
Pls DM template!
.
can you pls send it to me as well? would be highly appreciated!
Hi! 2 years late but could you please DM me this template as well? Struggling to find resources for an upcoming interview
Please could you send me the template too? I know a couple years after this comment was made, but would be super appreciated, for an OC in LPLs
Hi, could you also share with me this template please, thank you!
Back of the envelope math bro
Please elaborate
I have an upcoming Secondaries PE Associate role, firm similar to Whitehorse Liquidity (more tail-end secondary transactions focused), what interview questions/case study will it likely consume?
Please could anyone send me any case study materials/study materials, prep material or interview Q&A's for an PESecondary Investment Associate role at a firm similar to Whitehorse, predominantly tail-end acquisitions, and also let me know what likely I will be doing day to day and also what interview questions will I be asked? What will the 2 hour case study I have will cover?
Please send me a DM and send over anything of the above that could help me as I would really appreciate it, I can also provide my email on DM also.
Many thanks,
Can share some color here (rough thoughts):Secondaries modeling boils down to a distribution waterfall model to determine what go-forward returns could look like for a secondary investor (and often back into some purchase price discount / premium sensitivity from there).
Note the following applies to GP-led secondaries
To elaborate, you're trying to model out two items: 1.) the distributions 2.) waterfall1.)
Distributions: combination of different valuation methodologies, with management input on base case financials, and GP input on exit timing, which is critical later in the waterfall portion for the IRR calc. Structurally, I've most commonly encountered LBO / LBO Lite (making assumptions on a FCF % used for Debt Paydown yearly vs a full debt schedule) builds for each asset in the process, where you eventually solve for a calendarized equity figure according to exit timing estimates2.)
Waterfall: Distributions roll into a gross distribution table and the fund LPA / secondary vehicle fee structure is applied to get to a go-forward TVPI and net IRR secondary return figure. Essentially, if I as a secondary investor were to pay some discount x % to portfolio NAV today, given assumptions on distributions and exit timing, what does my go-forward return profile look like net of fees, carry, etc. Modeling out mgmt fees would entail looking at an LPA to determine when the fee base shifts from committed to invested capital. For the waterfall itself, fairly standard 4 buckets: 1.) return of capital 2.) preferred return, typically 8% 3.) GP catchup 4.) Carried interest profit split. You would reference the LPA for preferred return %'s and profit split %'s. In the context of a continuation vehicle, the above items would be negotiated via LPAC, and a tiered carried interest distribution waterfall structure could arise as well
Secondaries is a constantly evolving space and transaction structures can be fairly novel. Realize the above is some part a bit rambling so happy to answer any follow up questions!
Thank you! This was very helpful.
Thank you dirtypotato
I have a follow-up question. I am interested in the LP-led side of the transaction so hopefully, you can provide some thoughts. For an LP-led advisory side when pitching to an LP seller, what is the valuation process like to determine the LP seller is selling their stakes / interests at "market" discount rate of their NAV?
I understand a potential buyer will typically purchase the existing LP's stakes at a discount (an ideal situation would be at premium) to NAV. Say, a fund has a 10-year term and they are in their 7th year now. What calculations do you use to calculate the new buyer's returns once the fund is liquidated in year 10th?
Say, an existing LP A's committed capital is $100M (assuming there are more than one LPs in this fund and LP A is looking to sell their stakes). Where do we find out the NAV value to begin with? What is the name of the document that an LP-led advisory team would need to have to find out this information? If the NAV is said to be $80M and I would assume this is the NAV of the entire fund, how do we know, say, 25% discount to this NAV is fair to the LP seller? and if buyer A were to purchase this stake at 25% discount to the mentioned NAV, what are their returns like when the fund is liquidated?
It is more straightforward for LBO fund. EBITDA multiples are leveraged in the calculation process to determine MOIC and IRR, but not sure in the LP-led transaction. Thanks!
The NAV of the selling LP can be found in the capital account statement. This is a document that GPs usually provide their LPs each quarters. It should show their initial commitment, their called capital and distributions to date as well as the NAV relative to that specific LP.
There isn’t one standard way to calculate if the discount is « fair » to the Seller. I would say that as an advisor you should compare the proposed price to previous bids that were made on that fund if you know of any. Some funds transact multiple times on the secondary market, so let’s say that a fund typically transacts at 10% discount, anything above that is a good price and anything below is a bad price from the Seller perspective. But it also depends on the context: if the fund is close to its term (let’s say year 8 out of 10), usually there are deeper discounts than when it was transacting at year 3. Other things can impact the price such as the size of the interest for sale, the performance of the fund or the macroeconomic context.
Thank you for the explanation! For single asset continuation vehicles, I read online that the debt level tend to stay the same, is it because of dividend recap before the secondaries transaction to pay the LPs that doesn't want to stay? How would the sources & uses table look like? Would the equity paid (premium / discount to NAV) be on the sources side and on the uses side assume company cash to pay for the transaction fees?
Happy to provide some detail on this:
CVs are different than your standard LBO since these are “affiliate transactions” where the same sponsor is “selling” to themselves just in a new vehicle. Unlike your standard cash free debt free LBO, CVs tend to lock the balance sheet as of a certain reference date, and those figures are ported to the S&U.
As far as S&U go, new investor money is your plug and you’re building the S&U on a TEV basis. There’s no requirement to refi since the sponsor is able to roll debt over at same terms, but sometimes there is a refi done in parallel to right size the cap stack
Moving to equity, management roll is a significant portion. Generally want to see 70%+ roll here. These guys aren’t paying fees so they’re not in the CV, but since the S&U is done on a TEV basis have to include here
From there, we can move to the CV math. Typically assume that 80-90% of LPs will take liquidity, with the remainder rolling. For GPs, want to see full roll unless some unique circumstance (like an FO that is 50%+ ownership today), or non-active members who want full liquidity (generally accepted)
So now we have the accounts for debt, management, rolling LPs, selling LPs, and the GP and can build the S&U
Starting with uses, first comes the debt figure (either rolled or the new refi figure). Then comes liquidity for management, LPs, and GP. The summation of these should equal TEV
On the sources side, again start with the debt figure. Then comes rolling $ for management, LPs, and GP. The difference between total uses and sum of the above is your new money given by secondary investors
For fees, there are fees that are charged to the asset, fees borne by equity holders taking liquidity, and fees borne 50/50 by both buyers and sellers
Somewhat of a train of thought, but hopefully should help!
On the GP-led side, are investors really doing more than simply taking the GP’s model and slapping a waterfall on there and then taking a haircut to the assumptions? I know there are firms out there that market themselves as doing bottom-up diligence (which makes sense to form an opinion on the GP case) but are these guys really building a full model from scratch? Seems a bit like reinventing the wheel but coming from the advisory side it would be helpful to understand the process from an investors perspective.
Depends on the quality of the sell side model, I’ve seen some that are insultingly simplified that it requires building a newish operating model. But in most cases it’s akin to credit modeling
As someone who’s only worked in secondaries… what exactly does credit modeling mean?
I was told Blackstone Secondaries does a deal "every 2-3 days" so how much modelling can there really be man.
most definitely false
.
ugh. I'll handle this misconception.
In secondaries, if you are working on a standard way LP deal, the only info you will have is the quarterly report and AGM/LPAC materials (less common). This is what GPs share with their LPs and at best it will have rev/ebitda/net debt/capex for each company. you will not have enough info to build detailed line by line models that project out different pricing / volume trends, employee by employee census, etc.
I don't work at blackstone, but can't imagine that their modeling is any way different than the way we do it at our shop. You will have a consolidated fund overview tab, that breaks out the balance sheet of the fund and company by company NAV / cost basis. Then you will company specific tabs that breakdown what valuation the GP is holding the company at, and then your own entry valuation. There be a section for comps. Then you will have a section where you project out the company by company financials to estimate how much upside there is in each company. But this is all a pre-built template and frankly I have no idea why you would want to keep recreating the wheel every time.
So when Blackstone says that they are building models all the time, what they really mean is that they are filling in their pre-build template all the time. Now this still takes a lot of work as the information you are given by the GPs are inconsistent, and there may be several secondary sources of information that you have to pull from. It takes time to find comps and to think about rational cases for how much upside is remaining in each company. But you are not building some incredibly detailed model from scratch. Blackstone raised the largest secondary in the world and their MO is to look giant portfolios of LP interests, so this takes a lot of time to look into each fund.
For a GP-led you will be given a lot more information, but still the models are a bit more high level than in direct PE. That being said as someone who has spent time building incredibly specific, month by month models in the past, and used to think that modeling is the end all be all.. it isn't. What really happens is that you end up wasting hours on something that no one else realizes how long it takes lol. There is a lot more than goes into what makes a good investment besides a good model and in secondaries, it's really more about appropriately haircutting what the GP thinks.
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