Special Sits Secondaries?

This term has come up recently in a team meeting. I am used to just investing in plain old vanilla LP secondaries, like buying a stake in Bain or doing a simple GP led. What are special sits when it comes to secondaries?? A guy on my team mentioned

Origami, LSV, Felicitas, Arena, and Dorchester.

 

The LP-led secondary market started out as a way for LPs to get out of underperforming funds with distressed assets, he might have been referring to that. The evolution of LP-led secondaries toward a true PE strategy with unique characteristics and as a portfolio liquidity management tool for LPs is very recent (last 10 years max).

 

True. I find that most of the inefficiencies of the LP and frankly GP-led market have largely been removed. There are now buyers dedicated to doing deals as small as like 100k and pricing isn't bad.

Just curious what is "special sits" if it isn't buying esoteric and heavily illiquid assets.

 

This can take a few different looks: can be LP interests in special sits/turnaround funds, LP interests from distressed GPs/Funds (i.e Abraaj or for example funds where the parent company of GP is in a crisis = motivated seller under time pressure), direct investments in distressed assets (late-stage insolvency claim out of tail-end funds looking to expedite wind-up). 

 

Sounds like just a "junk buyer". One of the groups mentioned above is quite sharp - they buy NPLs and focus on structure and deep value

 

Which one is the standout, in your opinion? Curious because I've heard some really good/bad about certain ones.

 

LP secondaries started about 20 years ago and represented a probably sub $10 billion market. It was a dark corner of finance that you didn’t want to find yourself in because it typically meant you were failing. Secondaries slowly rose to prominence over the 2010s but really picked up after COVID. Despite rising rates deflating exit volume, LP demand for liquidity persisted, largely due to portfolio allocation mandates in LPs like insurance, trusts, or endowments. This radically shifted finance in a short period of time, giving rise to private credit funds (holding company PIK securities with 25% all-in cost of capital become the norm) for portfolio companies to bridge the incoming period of rising debt costs but also creative new ways to finance LP interests. The most obvious place was LP secondaries, in which a GP created a separate special purpose vehicle (SPV) through which LPs would contribute their interests and subsequently be capitalized by incoming investors, often at a discount to current NAV. As secondaries have risen in popularity, this discount has slowly risen from ~10% to rates as high as ~25%. Importantly, the vast majority of the secondary market has been characterized by strong PE assets, as investors have selected their best performing assets as the best candidates to receive attractive valuations and therefore liquidity. The next few years are going to be a shitshow as firms offload their shit assets, most likely through full sale versus a secondary. Long way of saying secondaries started as somewhere you don’t wanna play to a creative financing tool for LPs but it’s near term future is uncertain given the quality of assets about to be on the market.

 

Why would a rise in popularity lead to a wider discount to NAV, given that increase in demand would lead to increased price pressure and therefore tighter discount to NAV

 

That post was very confusing and/or inaccurate.

By popularity, he’s probably referring to LP’s finding it an attractive tool for portfolio management and therefore a lot of them are selling via LP-led secondaries. So in this sense, there’s a high supply of portfolios on the market with limited buyers so discounts widen.

Also, the structure he described sounds more like a continuation fund than an LP-led secondary. More often than not, an LP-led just involves a transfer of interest within the existing fund and no SPV.

On the performance point, there’s an argument to be made since secondaries will essentially track the broader PE markets performance. That said, these buyers aren’t stupid, if a GP has been exiting its assets below their projections, they are going to build in a bigger discount to reflect that.

 

There is so much wrong with this post that I won't even bother to refute all the points. But what are you talking here??

"The most obvious place was LP secondaries, in which a GP created a separate special purpose vehicle (SPV) through which LPs would contribute their interests and subsequently be capitalized by incoming investors, often at a discount to current NAV. As secondaries have risen in popularity, this discount has slowly risen from ~10% to rates as high as ~25%"

 

The post reads like someone used AI to generate most of the content and added the last two sentences with swearing and grammatical errors in an attempt to seem knowledgeable. 

--Death, lighter than a feather; duty, heavier than a mountain
 
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As the other posters have suggested, "special situations secondaries" could mean a lot of things and will continue to change as the strategy grows.

As of today, special sits secondaries usually describe firms that deploy structured capital in a non-primary commitment investment. For example, a firm (let's say Felicitas) receives an opportunity to invest in a late-stage growth company (good revenue growth, maybe EBITDA breakeven) in the secondary market. Felicitas would usually create a structure in which the downside is limited and could share in the upside (e.g., a 2x preferred equity structure). Special sits could also be used to describe a secondaries strategy that is not like the usual LP/GP secondaries transaction; for example, the fund could be focused on credit secondary opportunities (e.g., credit funds, credit investments, etc.). 

--Death, lighter than a feather; duty, heavier than a mountain
 

Ah, that makes sense. I encountered them in a deal once and they were super sharp.

 

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