Secondary PE Fund - Valuation Interview Questions
I have an interview for an Associate position at a major secondary PE fund next week and I am trying to understand how such a fund would go about pricing a standard secondary transaction. I would be very thankful if any of you could have a look at my questions below and provide me with some feedback. Thank you very much!
I would imagine when a secondary fund buys a LP's stake it conducts its valuation in two parts. One part consists of valuing the current portfolio of assets which the GP has already acquired. Would a secondary PE fund do mini LBO's on each of the portfolio companies in order to determine the value? Would they use an IRR of 15%-20% on each of the companies to determine the price? Or would the secondary PE fund use a simple NAV approach?
The second part of the pricing would consist of valuing the unfunded part of the LP's stake, right? How would a secondary fund go about valuing this part? Would they just try to estimate the GP's performance in general and assign an expect IRR?
I would be grateful if any of you could also provide me any guidance on what kind of questions to expect during the interview. Would they ask me to do some LBO modelling exercises?
Thank you very much for you help!
Secondary Private Equity PE (Originally Posted: 10/28/2010)
I have an upcoming private equity interview with a Secondary Private Equity firm as an analyst. Would this knowledge be a good starting point for someone looking to break into PE or IBD? I know IBD typically goes to PE afterward, but whats the career path for analysts starting out in secondary private equity?
Do they deal primarily with FoFs on the secondary market? What kind of technical knowledge should I study up on for the PE interview? How transferable are the skills I will learn? What's compensation typically look like?
Sorry for the deluge of questions and thank you for reading. If anyone could give me some advice it would be greatly appreciated.
Thank you so much!
They're called Secondaries, not Secondary Private Equity... Secondary Private Equity is Secondary Buyouts which is totally different than secondaries...
im guessing your interview is with Lexington Partners? If you are trying to break into PE, then id pass. PE firms generally hate secondaries. hope that answers your question.
that being said, FoFs and Secondaries AUM per Partner is compelling despite their lower fee structure.
PE firms hate secondaries. I think they hate idiots who make bold generalized statements...
PE firms don't hate secondaries, they enjoy the fact that it stops LPs defaulting on their drawdowns...
I'm also interviewing for BlackRock in their PAG group.
What do you guys think, what would you go for?
Thank you in advance
hey guys,
Please help me understand this.
Suppose there is firm that identifies themselves as an agent for secondary directs but also makes direct investments themselves.
what exactly do they do? I would imagine they advise the firm re. valuation/process/and buyers
sort of like a sell-side ibanking process except you're looking for funds and investors to buy and not anther company?
^ Sounds like a bad PE firm to me, but probably fundless sponsor. And yes, for the direct secondaries they would be pitching to other PE shops that may want to take on the company.
If it's a respectable secondary group (there's not that many out there), I would definitely take it over BlackRock PAG. Plenty of associates/analysts go to secondary PE out of a banking analyst stint.
In terms of compensation, less than direct PE because you're doing less work in general and not quite an active investor. But overall, it's not a bad gig - just don't expect to be jumping over to the direct PE.
I work in a secondary PE group. I have known people to move over into direct from there but you are not a shoe in just because it has PE in the title. In terms of what to expect as an analyst you will be doing a lot of modeling. Depending on the place you will get some travel time and although you will not likely buy companies directly (but rather a portfolio of companies) in the event you are looking at a highly concentrated portfolio you would expect to do a much more in depth diligence on that company (ie go out to the company, meet the management etc.). As you can see there is some crossover into direct which is why it is certainly not impossible to make the move. In terms of technical skills you can expect the interview to be similar to an ib interview with all the same skills required. You can also expect them to be looking for someone who is very resourceful... in this industry data is not always easy to come by so you need to work with everything that is available to you.
To answer the industry related question you had on who secondary guys typically deal with it is actually rare to see it be a FoF group. Most FoF guys will also do secondary investments (typically because existing PE relationships are a strong source of deal flow / portfolio date) also FoF guys don't have the liquidity issues other players may have since they have an LP base they are allowed to draw upon on demand. You would expect your sellers to be endowments, pensions, family offices, etc.
To answer a question regarding an agent / secondary investment hybrid it seems like a strang structure to me. I would be concerned if that firm put a bid on my assets when they were acting as my agent as well - it seems like a potential conflict of interest here. I can see the use though in syndicating large deals where you can't or don't want all the names but it still difficult fo rme to reconcile the conflict of interest here.
And finally.. the statement that direct PE guys hate secondary guys is not necessarily true. With any investor you can have your differences but there is actually a good reason direct PE guys LOVE secondary guys - a staple. Where PE funds set you up with a distressed LP of theirs with the understanding that you will make a primary commitment to their next fund (which has become a lot harder to raise then they used to be)
Hope this was helpful for you, and good luck on your interview.
Thank you everyone for their kind and informative comments.
I finished my interview, but I don't know how I did. I always get post interview jitters, so hopefully it's just my paranoia affecting me. I know what I'm going to do now, though. It sounds like Private Equity secondaries is definitely the way to go. Keeping my fingers crossed!
Hey,
Can you let us know what were the questions during the interview? especially technical question. I have an upcoming interview with a secondary PE firm, and would like to know what's the best way to prepare?
I know the Secondary market is different from Sell Side IB, and models like DCF are almost never used, since they discount based on the IRR, also Credit Rank of the Company and the Operating performance are two most important gauges for identifying a good investment, am I wrong?
Thx
Interview with large secondary PE fund (Originally Posted: 03/30/2012)
Friends,
I have a telephone interview with a very large secondary PE fund, and am not really sure what to expect. Can anyone shed some light on the type of things I'd be expected to know?
Thank you
run. you dont want to work in secondary PE
Currently in secondaries. Fit is very important. M&I is a good starting point. Make sure you know what a secondary transaction is - direct/synthetic vs. LP secondary and the creativity aspect behind the structure of each deal. Too many times I have interviewed candidates that have no idea what a secondary transaction is. Really understand the secondary market and why it is beneficial to the system (LPs/GPs) and why it benefits you as a player in that market (pushing out the j-curve, fresh perspective on the assets, creative structure of deals). JOBS Act that is being reviewed will have an impact on the primary side (VC and fundraising), this will have a lagged effect on the secondary market as well. Also, look at the major players websites (Lexington, Coller, Adams Street, Industry Ventures, etc). They usually have a brochure about their firm and the secondaries market. PE secondaries on Wikipedia is a good starting point as well.
You can PM with some questions if you want.
PM me, I work in direct secondaries.
Interview with PE Secondary Fund (Originally Posted: 04/19/2012)
Got an interview with one of the larger secondary funds. It's a final round with a series of interviews and a case study. What type of case study should I expect, LBO? What are the key technicals questions to know?
Any help appreciated.
Study as much as you can and be prepared for anything. Shouldn't try to focus on specific questions and then wind up being asked different questions in which you have no clue about. What's the position you're interviewing for?
Per MBA associate
I assume when you are talking about secondary fund, you are referring to buying other LPs stake? If that's case, lbo models and typical PE case study won't help at all.
At work now, so can't type too much, but try to do a search on "FoF secondary interview" or something along the line, you will find something more relevant
Secondary PE interview - Case Study and Modelling Test (Originally Posted: 01/16/2016)
I have been invited to do a "bring-home case study" and subsequently a modelling test for a major Secondary Private Equity fund. I have done these for direct Private Equity funds before but not for Secondaries. Could someone please help me understand the typical structure / focus of these?
Will the case study be similar to direct Private Equity with focus on one company investment opportunity or will these be looking at a potential LP interest with underlying companies? What is the typical structure of the case study?
Will the modelling test be done as an LBO or as a bundle of companies for which you need to do mini-models for each and then aggregate less fees + the return on the unfunded part?
Any advice or good sources for prep would be highly appreciated. Have read through the modelling treads on WSO.
Thank you
Typical secondary transaction is anywhere from 5 - 25 fund interests. For this exercise I assume they will give you some simple fund metrics instead of underlying financials and ask you to figure out what gross multiple these funds will ultimately liquidate at. Fees can be estimated using the net multiple. From there, you need to find the appropriate purchase price to meet your fund's required return ie. what percentage of NAV can we buy this shit at and make 1.15x-1.2x? Feel free to PM with specific questions
It will probably be more company specific than that. I'd expect them to ask you to model out a few companies (mini models), then aggregate those cash flows to run through a fund waterfall.
Also, target returns are much higher than 1.15-1.2x.
Assuming the test will largely be around your ability to understand and accurately model complex waterfall structures.
I tend to disagree with this. I've been through a number of Secondary PE interviews, and the emphasis was more company specific - i.e. what you learned in IB. The waterfall fund dynamics are something that can be taught pretty quickly, interviewers are more concerned with your sense of valuation.
I have never interviewed for a position at a secondary fund. however, my fund recently went through a secondary process and I had the immense luck of having to run the process so I am quite familiar with how secondary funds think. The funds who had a look at our portfolio all did a pretty deep diligence on the individual assets. The fund that we ended up exclusive with probably did ~75% of the DD we would have done so they definitely put a lot of time and effort into it and definitely look at companies very similarly to how PE firms do it.
So with regards to the interview, I assume you'll be asked to built a consolidated model with 5-8 companies mini-models with asset-by-asset valuation. I am not sure the waterfall does really get that complex (secondaries tend to restructure carry to the European style so it's all paid at the end on a combined basis which is pretty simple) so I don't know if that is going to be that much of a focus. Then do a write up where you talk about highlights / considerations and return expectations for each assets and for the portfolio in general and give out a recommendation on whether you want to go forward with the opportunity and at what price (secondaries usually goes for 80-90% of NAV).
Guys,
Was confused about what you guys mean when refer to the waterfall.
For instance, if LP has interest in a fund that has about 20 different portfolio companies, and each of these companies have a different exit date, how do you calculate the returns? For traditional lbo model that I have done, since it is for one company, I just take the exit equity value / sponsor equity, but not it is a portfolio of different companies with different exit date, do you just aggregate all of those equity value together, divided by say 1.5x, 2.0x that you are targeting, to get to the amount you are investing at first?
Thanks guys,
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