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Secondaries in the PE context usually refers to the buying and selling of LP interests in exisitng private equity funds. So for example, lets say a pension fund commits to several mega funds and after a few years decides that they want to exit the PE space. There's no active market for these LP interests so the pension fund would most likely have to go to an intermediary to shop the interest around to dedicated players in the space (i.e. secondary private equity firms). The key diffrence between this market and the FoF market is that the secondary player is buying into the assets already purchased (i.e. they have visibility towards the cash-flow profile of the fund). A FoF investor is only betting on the manager's skill set.

http://en.wikipedia.org/wiki/Private_equity_secondary_market

 

[quote=J_WSO]Secondaries in the PE context usually refers to the buying and selling of LP interests in exisitng private equity funds. So for example, lets say a pension fund commits to several mega funds and after a few years decides that they want to exit the PE space. There's no active market for these LP interests so the pension fund would most likely have to go to an intermediary to shop the interest around to dedicated players in the space (i.e. secondary private equity firms). The key diffrence between this market and the FoF market is that the secondary player is buying into the assets already purchased (i.e. they have visibility towards the cash-flow profile of the fund). A FoF investor is only betting on the manager's skill set.

http://en.wikipedia.org/wiki/Private_equity_secondary_market[/quote]

Nailed it.

 

Secondaries are funds that purchase PE interests that already exist. There are two types:

1) Direct Secondaries - these purchase portfolio companies from other PE firms that want to exit their investment. So say KKR invests in Company Z. Three years later, KKR is not interested in holding the company or investing in it further, so they decide to sell Company Z to Secondaries Firm. Secondaries Firm later exists the investment via IPO or a sale to a strategic.

2) LP Secondaries - As J_WSO said above, these are when Secondaries Firm purchases the interest of an LP in a PE fund. So say Pension Fund B commits $100mm to KKR and later want to reduce their exposure to private equity, Secondaries Firm can buy the $100mm interest (at a discount usually).

There's plenty of more info out there if you search but that's the basic overview.

 
Banker88:
Secondaries are funds that purchase PE interests that already exist. There are two types:

1) Direct Secondaries - these purchase portfolio companies from other PE firms that want to exit their investment. So say KKR invests in Company Z. Three years later, KKR is not interested in holding the company or investing in it further, so they decide to sell Company Z to Secondaries Firm. Secondaries Firm later exists the investment via IPO or a sale to a strategic.

2) LP Secondaries - As J_WSO said above, these are when Secondaries Firm purchases the interest of an LP in a PE fund. So say Pension Fund B commits $100mm to KKR and later want to reduce their exposure to private equity, Secondaries Firm can buy the $100mm interest (at a discount usually).

There's plenty of more info out there if you search but that's the basic overview.

One additional area is the secondary purchase of LP co-investment interests - which is obviously a mixture of 1) and 2).
 

This sounds just like a fund of funds gig, but you're actually buying existing LP interests instead of investing in new funds.

Different funds have different structures, with some mix of sourcing and modeling. The sourcing involves cold calling and potential conference attendance depending on the culture of your firm. The modeling involves valuing a fund's portfolio by ascribing valuations to each individual portfolio company. You then try to see what the fund's returns will look like when the portfolio exits. You then come up with a valuation you are willing to pay, based on a combination of the fund's current valuation and the multiple you want to achieve based on where you see the fund exiting.

The secondaries world is a tough one, since you are generally buying portfolios that other LPs haven't been able to realize a target return on. In some instances, the LP may be reducing its allocation to the asset class, so the decision would be driven by different factors but at the end of the day, an LP won't offload a portfolio it has confidence in. Therefore, pricing these things becomes an interesting negotiating game.

 

As CaliBanker said, the pricing of a secondary position is driven by your view of the underlying companies. For a given fund, you effectively have multiple short-form LBO models to assess total expected returns. You then layer on assumptions about fund level fees, carry, return to be generated on unfunded commitments, etc. Because you take a bottom-up approach, the discussions you’re having internally resemble those you’d have in any direct team i.e. what are our expectations about growth rates, margins, exit multiple, debt pay-down, working capital & capex requirements, etc. Key difference is, you have less information available, and because you’re looking at a diversified portfolio you can go into less depth on any given company. Effort will be focused on those assets expected to drive the majority of returns.

The nature of deals can vary quite a bit. As well as buying LP stakes on the secondary market, you may purchase a portfolio of direct holdings without any fund structure. In this case, depending on the number of companies, you may put more work into your LBO model as there’s less scope for wrong assumptions to even themselves out across the portfolio. On the flipside, you may buy a portfolio which includes a large number of funds and fund-of-funds. Such a portfolio may have hundreds of underlying companies driving returns and a bottom-up approach is impossible. Your modelling in this case involves thinking about portfolio composition by asset type, fund vintage, geography, GP quartile, performance to date, etc. and taking a high-level multiples approach to the underlying assets. The majority of the time the underlying assets are vanilla mature companies. But large books of assets often have other random bits and pieces which you'll also need to value, i.e. infrastructure assets, mezz and early stage VC

Progression is much like any other firm. Senior Associates drive the modelling and depending on deal size, do some project management. They'll also draft investment committee docs, handle random risk management requirements and assist with execution paperwork. VPs focus on project management, execution and deal sourcing. Both associates and VPs will attend GP updates, AGMs, etc. Partners get involved in project management and execution to the extent it is necessary, but are generally out deal sourcing. There is less in the way of ongoing portfolio management because even when you buy a block of direct holdings, you put in place a team to look after them for you. But as you're the party ultimately in control, there is still work to do in this area.

Post MBA base salary likely to be above that of a IBD associate but with a lower bonus range c.20-50%. On the upside, you hopefully get some carry.

 

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