It's a term widely used but also seen in some quarters as derogatory: the “secondary tourist”. It applies to limited partners exploiting current market conditions to buy private equity assets and portfolios directly rather than through secondaries funds. “Secondaries specialists have been largely absent [from the market],” says Brenlen Jinkens of secondaries adviser Cogent Partners. “The big players have been primary investors starting programmes. In terms of buying assets, they've accounted for 80 percent of what we've seen over the last six months.”
Urs Wietlisbach of Swiss alternative assets manager Partners Group estimates there is currently around $20 billion worth of this “non-traditional” capital on the sidelines. He thinks that for those LPs launching new programmes or adding to favoured strategies or geographies, buying immature portfolios at a substantial discount from stressed or distressed sellers can “make a lot of sense”.
He adds, however, that there is a danger in such investors thinking they can easily broaden out from temporary, opportunistic investment in immature portfolios to a longer term, more general secondaries strategy that incorporates more mature portfolios – and, in so doing, change their status from that of a tourist in the market to a resident. “In many cases you have to look really rigorously at the financial structure of the underlying companies – at things like how covenants have been set and what happens when they're breached. If you're talking about, let's say, 2004-05 funds which are 80 percent funded, that's a tough investment unless you have a team that's able to dig really deep.”
Adds Marleen Groen of secondaries specialist Greenpark Capital: “Some LP teams are under-sized, they're not resourced to do secondaries – but they're getting deals because they are prepared to pay more. In most cases what they should be doing is co-investing with a secondaries fund so they can get their costs down but also get an experienced team alongside them.”
But not everyone agrees that parts of the market need necessarily be the preserve of the established specialists. “The traditional players will say “we have to find the right assets and that's really hard”,” says one market source. “But the primary investors have good information on the funds, they know them very well. Some will go back to the day job, but others will stay in and build up their teams.”
The same source says a process of “de-mystification” is taking place in the secondaries market by which new players are increasingly emboldened to undertake secondary trading activities because they simply no longer see the need for intermediation.
This is the same process, it might be added, by which investors over the years have eventually opted to invest directly in the primary market having previously done so only through funds of funds. Ironically, funds of funds now stand to be the beneficiaries rather than the victims of this maturation process as they are among those actively engaging with the market.
”If you're a fund of funds and you can make a secondaries commitment at a discount, why bother with the primary market?” asks Dominik Meyer of secondaries adviser AXON Partners. “They're very much part of today's market alongside the portfolio builders and “top-uppers”. Over the last six to nine months they've been quite active.”