Non-traditional buyers in the secondaries market have been increasingly eyeing up LP stakes that are only partially funded or unfunded, making bets on the management team behind the funds rather than the underlying assets.
These interests, known as ‘early secondaries’, have flooded the market since the financial market meltdown last year. According to one source, the amount of minimally or unfunded LP stakes on the secondaries market today is even bigger than in the 2001 downturn.
“This is the first time we've seen a large number of investors trying to sell large amounts of vintage funds in the first year,” Kelly DePonte, a partner with San Francisco-based placement agent Probitas Partners says.
The sellers of early secondaries in the current market include many endowments, who suffered enormously in the downturn after committing too much to illiquid investments and not paying enough attention to liquidity levels, sources tell PEI. Many of the buyers in today's market are public pensions that have only recently started investing in private equity.
Recently, AIG came to market to sell just over $600 million in limited partner commitments from its balance sheet. The struggling financial giant warehoused two large pools of commitments on its balance sheet on behalf of the fund of funds division of AIG Investments, an asset management arm being sold to Pacific Century Group.
One chunk of stakes AIG is selling consists of $240 million of commitments the insurance giant made from its balance sheet to various general partners, which AIG intended to transfer to its sixth fund of funds. That fund has not been launched.
About 25 percent – or $60 million – of the $240 million has been drawn, the source said. The net asset value of the $60 million has been estimated between $50 million and $55 million.
Because buyers of these are backing management teams rather than underlying assets, early secondaries can be a good way for investors new to the asset class to get into a fund they may have missed when it was being raised.
The Tennessee Consolidated Retirement System, which made its first-ever commitments to private equity in August this year, has been exploring early secondaries. However, having looked at some opportunities it concluded it would not be able to move fast enough on a decision to invest, according to the pension's head of private equity, Lamar Villere.
“Early secondaries would be an area that would make sense for us to go into. [We'd look for managers] that we would otherwise wait around for three or four years to invest with,” Villere says. “We could start that relationship now.”
SL Capital Partners, the funds of funds unit of UK insurance giant Standard Life, has seen a lot of opportunity in the secondaries market this year and has been specifically targeting early secondaries stakes.
For a seasoned fund of funds, buying into early secondaries is a way to take a bigger position with a manager the fund already knows and trusts. “There's already a lot of knowledge in the portfolio and confidence in the managers,” said a source.
But for all the early secondaries stakes on the market today, there is not much money targeting the opportunities. “There is a ton of this stuff out there, but not much capital to go around,” says Todd Miller, managing director with secondaries adviser Cogent Partners.
This is a situation that may be changing, however, as some firms are specifically targeting early secondaries strategies. Goldman Sachs is raising the $300 million Goldman Sachs Early Secondaries Fund – the bank's first ever fund dedicated specifically to investment in young LP stakes. The firm closed a $5.5 billion general secondaries fund earlier this year.
The Goldman fund will target stakes that are less than 50 percent drawn, according to a market source.
Axa Private Equity, which is backed by French insurance giant Axa, is targeting €600 million for its fourth early secondaries fund.