Single asset continuation fund - How thorough are you in underwriting?
I work at a large, diversified secondaries firm doing both GP and LP-led transactions. How thorough has your underwriting been? Based on my experience at the firm I work for, our underwriting has never been that deep, even when we were the lead investor.
For models, we basically just used whatever the GP provided and adjusted their assumptions to come up with a reasonable return. We also relied heavily on the data presented in the CIM and external reports provided to us.
Is this really the nature of the market? I feel like most secondaries deals are brokered, and whenever our team tried to ask important questions, I noticed that GPs often deflected them. In most cases, we just had to take a leap of faith to stay competitive in the process.
Has your experience been any different? I realize there are more funds running single asset funds now. I am curious to know if you have gone much deeper into company-level data or built your own models independently at your firm.
Based on the most helpful WSO content, here's what you need to know about underwriting in secondaries, particularly for single asset continuation funds:
Underwriting Depth:
Modeling Approach:
Data Utilization:
Market Nature:
Experience and Adaptation:
In summary, while your experience aligns with the broader market practices, the depth of underwriting and reliance on provided data is common. The ability to quickly evaluate deals and adapt models is essential in this competitive landscape.
Sources: Q&A: PE Secondaries Principal, Differences between Co-invest and Secondaries?, Q&A: PE Secondaries Principal, Going A2A.. feel like a failure, Learning Curve as 2nd Year Analyst
Just avoid Clearlake continuation vehicles and you'll get market returns. Hope this helps!
Are you leading deals or are you participating as a syndicate member? In my experience, there's a notable difference in how the GP and the intermediary manages you depending on this.
At my firm, we lead about 70% of the CVs we invest in and then participate as a syndicate in the other 30%. If we are a lead, we are generally doing 80-90% of the work that a buyout firm would do. So we generally ask for customer / data cubes level info, past financial statements, leases, insurance details all of that. We will do management meetings, tour facilities, expert network and customer calls etc. If we are a lead, we will have our own LBO modeling done on the asset. But we will generally not engage our own advisors, we are usually relying on the GP's CDD and QoE work - I guess that's one difference from a direct buyout.
In a syndicate deal, all of this is different. We are generally doing 2-3 calls and maybe an onsite meeting with the deal Partners. We will review the CDD and QoE. We will talk to a few other PE firms that have similar assets to understand the market. Unlikely that we will build our own LBO; instead review and sensitize GP model. That's it. The focus is on understanding the business, the market and validating the GP's business plan.
6 months - 1 year in being a lead, 4-6 weeks for a syndicate.
As a GP who is involved in a CV on the other side: oh shit
Why do you say that?
Curious on the advisor point (haven't worked on the other side) - up to what level of DD do you not use advisors? I imagine yes for legal, but is everything else a no / ask sponsor to provide? Just curious b/c I imagine I'd want some technical and other validation done (not financial-related), and don't assume that sponsors readily provide this. But I haven't been on the other side of this so I don't really know.
What type of advisors are you talking about - CDD work by bringing in a MBB firm? Using your firm's networks to bring in a Operating Partner? As far as I know, no secondary firms do this. Of course, we and everyone else, will have our own lawyers and tax counsel for structuring work.
Not sure what type of technical validation you are referring to but I'll make this point: despite what many secondary firms tell their LPs or pitch in their recruitment process, you need to understand that investing in a secondary whether LP-led or GP-led is a passive investing approach. Once you fund your capital, you have no say over anything other than conflicts of interest. Governance wise, the lead investor would be lucky if they have a Board seat, otherwise its just an observer seat. All of the work is done upfront - get comfortable with the company, the industry and the GP's value creation plan. Then ensure you are entering the deal at an attractive valuation. Diversify since again, this is a secondaries strategy. I know not all market players do it this way but in my opinion no company should represent more than 3% or 4% of your fund if secondaries is your strategy.
With that background, what is the point of validating some nuance in the company's revenue stream that make up a small portion of the business? In a direct buyout, of course you would spend time on it. In a secondaries strategy, you sensitize it in your downside case and move on.
Thank you for your response. I am quite surprised that your experience is vastly different from mine. We primarily lead transactions. What kind of shop do you work at? Do you work at a mega secondaries shop? Also, do you work at a GP-led secondary shop with a single asset secondaries fund? I work at a fairly large, diversified secondaries shop that does both GP- and LP-led transactions.
At my shop, we would not ask GPs to provide customer-level data or lease information, etc., unless there is a compelling reason to do so (such as customer concentration). Even then, it would not be at the level of depth you would find at a direct buyout fund. I have also never done site tours or conducted customer channel checks. I am surprised that GPs would be okay with that unless you are speaking for the entire deal.
Do you rebuild the model internally based on financial data provided by the GP? Do you have an internally developed single-asset template? May I ask what the purpose of that is compared to using the GP's model and adding a secondary model to it? Is it to ensure that you avoid heavy adjustments made by the GP to the model?
Lastly, how do you engage in the same deal for 6 months to a year? I have not come across deals that elongate for that long. Typically, GPs and advisors provide leads with 8–12 weeks at most to engage. If you were given 6 months or a year, you are essentially deferring your payment for that period while the reference date pricing remains stale, which I am not sure GPs accept.
Ok, maybe I have unintentionally exaggerated things a bit. I didn't mean to say that we ask for lease level information on every deal we do. That was a multi-site QSR deal where that was important, so we asked them for it and let counsel go to town on those agreements. That level of diligence is certainly deal specific. But customer level data, channel checks - every deal. Site tours - again deal specific. Obviously not for an enterprise SaaS business but a F&B manufacturer - definitely.
But to answer your question I work at a shop that does primaries, secondaries and co-invest. Sec is our largest arm and we have a sizeable diversified fund, a smaller GP-led only fund and some SMAs very active in secondaries. We don't have a single asset only fund.
Yes, we have our own templates for single asset underwriting. I thought all secondary firms do? I mean, with customer level data and detailed cost information, we get all the data to build our own model. As far as I have seen, the GP models in banker VDRs are super light.
My comment on the timeline may have been misconstrued. Once a process officially kicks off, you have about 8 weeks to get to final IC approval. But bankers reach out to us fairly early at times when the GP is just beginning to think about the deal - I have seen situations where a multi-asset deal becomes a single asset deal over the course of 6-7 months because we (and maybe other leads) are not comfortable with certain companies in the deal.
In all honesty, I thought all of this was par for the course when you are a lead. I will also note that there is a market misperception about what leading a deal is. There are funds out there writing $50-75mn tickets and negotiating a 'lead' position so they can have their names show up on Secondaries Investor. The largest single asset CV we underwrote, we wrote a > $500mn check to the transaction. I have noticed that in situations with Co-leads, it's harder to get full data from the GP.
Agree with the above comment - surprised you can do this much DD on a CV as a lead investor - are you sourcing these deals on a proprietary basis? Feel like the more sizeable ones from reputable GPs are banked and under a short timeline
Thanks. But honestly, which deals are truly proprietary in the CV market? Other than the time frame, what has been your experience? Do you typically lead transactions? Do you usually use the GP model or rebuild the model? Also, do you try to do DD on your own other than what is provided by the GP or the management team? Is your experience aligned with mine? I just feel like my investing experience is not as thorough as I would like it to be. Is this the nature of the market?
As an advisor in this space, please give me an example of when building your own model actually made a difference. It makes no sense to me when investors say this. In my experience the models provided are a perfectly good starting point to expand on and building one from scratch just sounds like you do it for the sake of saying you do it.
In my opinion, the more important aspect of underwriting these deals is LP’s network of GPs and expert calls… I truly don’t understand what difference recreating the model does and, as you said below, the only reason you would do this is to add small details that don’t make a difference since the main drivers are going to be in the deal provided model.
Ermmm, you are right, the models provided are indeed a perfectly good starting point to expand on.........so we use it as a starting point and expand on it...... using our own models. Weird that you seem pissed a few secondary shops are doing their own models.
I am relatively senior in the group and I will tell you this: no one above the VP level at our shop is really spending much time in the model. Principals and above care about whether the opportunity presented is a good under writable deal that can be defended at IC. Full stop.
As to why we do our own models, I don't know man. It's the way it's always been done at my shop. It doesn't take our Analysts and Associates that much time to do up the models. The Partners on the IC are in their late 40s and early 50s. Obviously, none of them are diddling around in a GP's or even our own model. Having our template standardizes memo writing and financial projections & drivers as much as possible so everyone on the IC, including people who are not on the deal team, easily understand what is being presented. That's why we do it, I guess. Then again, I thought everyone else does this too.
I am not out here saying this is the only way to do it. If a firm is successful using a GP model and sensitizing it, more power to them for being more effecient. The only measure of success in this business is how much $$ you make, not who has (or does not have) the prettiest model. You are an Analyst now, you will understand that as you progress in your career.
It doesn't make sense, its just a marketing point for investors
My group has done some CVs as a member of the syndicate and this is spot on.
Welcome to glorified co-investing, it's not that deep :)
Said this for eons on these CV-single asset focused funds (cough ICG) pounding the pavement for how they smash secondary fund benchmarks out of the water. No shit your fund owns 15 single companies and is a co-invest fund with funds who either want to get out of a company or have already made a 3x and are throwing it to you. Real secondary funds have basically a zero % chance of not making some money net of fees for LPs while these single-asset focused CV funds, namely ICG, whose last fund is a bunch of shitty tech CVs thrown together by Clearlake and other dead sponsors (2 years after buying the assets). The space has become a joke and while the idea of a CV is great in spirit for assets held in year 14 of a fund, like everything in the PE world people run way too far with it and raise way too much $ for something so niche. Like usual it will end horribly for LPs and fine for GPs (who are raking in hundreds of millions in management fees).
To play devil's advocate:
1. I don't think anyone is comparing the ICG fund to secondary benchmarks. People should be comparing them to a direct buyout fund benchmark.
2. 100% disagree on these being assets where the sponsor wants to get out of a company. In 100% of the CV cases I have seen, the sponsor rolls all of their GP commit and any carry realized into the CV if they aren't even putting in further capital. The GP is about as incentivized as they can be to ensure the success of the CV. If not, they lose their commit and carry they could have earned by just selling the asset outright. Nobody's throwing anything at anyone.
3. Clearlake CVs, understandably, get a lot of scrutiny. Wheelpros is a donut but Precisely I think is a >3x. I think DigiCert and symplr will be fine enough even if it does not hit original projections. Other than a deal with Onex, I wouldn't describe any of ICG deals as being done with a 'dead' sponsor.
4. Completely agree on your last point. Some of these especially single asset CV funds will be duds. LPs will bear the brunt of it while GPs will make hundreds of millions in management fees and carry while generating a low double digit return for LPs; lower than what they could have achieved by throwing the money at an index fund.
This has been our experience with GP-led as well, and it’s why we do mostly direct deals with better access to management for diligence. Brokered transactions where information is held too close to the chest just aren’t worth spending time on for us. If we can’t get through our standard (not unreasonable) diligence then we just bow out. Sometimes even existing VDRs used for the primary will be lacking basic things like an audit or articles. Not sure how the growth players were underwriting those deals but it’s not enough to get our work done…
I assume these direct deals are shares you purchase from employees, VCs, or growth funds. In those cases, what is the incentive for the management company to provide you with access to information? Is it because they expect you to fund their future rounds? Does it happen simultaneously?
Also, who are the key players in the market? Do you mostly hire talent from VC or growth equity firms? Do you hire people from PE with traditional secondaries experience? Sorry, but this area is still relatively new to me, so I was wondering.
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