The contemporary notion of senior secured loans needs to be updated to reflect some of the inherent characteristics that make it one of the fastest growing asset classes in markets.
AFCA stands by the use of its “But for” methodology to calculate compensation payments, despite the FAAA’s protestations. Clients will get paid what they lost, plus what they would have earned if the advice wasn’t inadequate. Just don’t call it payment for theoretical loss, or opportunity cost.
Secondaries come first for some investors: Pantheon
Private equity secondaries is a niche area of PE that is growing in popularity, but there is a good argument that it should not be niche at all: in many ways, it has more attractive attributes for investors than PE as most people know it, Charlotte Morris, partner at London-based private markets investor Pantheon, told The Inside Network’s Alternatives Symposium.
“Most investors, when they hear the term ‘private equity,’ think of primary PE funds buying equity stakes in private, unlisted companies,” Morris (pictured) said. “Secondaries is the trading of these stakes. Secondary transactions offer those initial investors the opportunity to exit positions early, providing much-needed liquidity or capital flexibility.”
The concept has existed for some time, but it first emerged into broader consciousness at the time of the global financial crisis (GFC) in 2007–2008, when many LPs (the ‘limited partners,’ or the investors) in primary PE funds found themselves in dire need of liquidity. Secondaries investors came into the market offering just that; in return, buying the holdings at a discount to net asset value (NAV).
But the market has evolved since then, and secondaries is no longer “just that solution for desperate times,” Morris said; it is now “simply a portfolio management tool”.
It could be that an institution wants to reweight the mix of exposures that it holds, across particular vintage years, sectors or geographies, or it might be liquidity needs.
“In the last few years in particular, liquidity has been quite challenging, and exit opportunities from private equity funds have been limited – particularly the initial public offering (IPO) opportunities on stock exchanges,” Morris explained. “So, investors have come to the secondary market to augment those distributions and cash coming back that they haven’t been receiving. Or it could be that I want to invest in a particular manager’s new fund, but I need more liquidity, so maybe I’ll sell the older funds that I hold so I can invest in the manager’s new fund.”
Another recent change in the market is the rise in ‘GP-led’ transactions, where the ‘general partner’ – the PE fund manager – may strategically choose to sell under-performing assets in advance, to boost the overall performance of the fund. Alternatively, a GP may put a star performer (or performers) into a single-asset or multi-asset ‘continuation fund/vehicle’ in order to retain them.’ The current LP investors can ‘roll’ their exposures into the new fund, or sell their positions. In this way the GP can retain ownership in the top-performing companies to maximise long-term growth, while also providing liquidity for LPs who want to exit.
“There are many more different reasons now for approaching the secondary market, and that has meant it’s grown,” Morris said. “When I started investing, the market did about US$10 billion of transaction volume in a year, whereas this year is expected to be about US$150 billion.”
And for PE investors, the secondary market is arguably a more efficient method of investing in the asset class than primary PE funds, which were all about capturing the investments’ capital growth with an illiquidity premium, through a closed-end vehicle. “That was a great outcome, but there were quite a few drawbacks to it,” Morris said. “One, you were taking ‘blind pool’ risk, you didn’t know exactly which companies that fund will invest in, but you’re backing the manager and the strategy and what you hope they’ll be able to do. Second, the GP took a long time to fully invest your capital, which meant that it was long time before you saw a return.”
But a secondary fund buys when the primary fund has partially or fully invested the money. “We buy in, typically, four or five years in, there are already companies there, and we buy at a discount to NAV. We can look at those companies, we can assess how they’re doing, look at how quickly they’re growing, and make some forecasts about when the cash will come back,” Morris said.
“That mitigates risk at the beginning, and it also means that you can put your capital to work, invested in companies, immediately, which is so different from primaries, where it can sometimes take up to five years for your capital to be fully invested. Across a portfolio of secondary purchases, where you buy a number of different funds and each of their different underlying companies, you can see some cash coming back immediately,” Morris said.
That represents quite a different profile to primary investing, where investors could need a decade to see the investment through from start to finish. “In the UK, that element of liquidity in an asset class that has traditionally been illiquid has really helped wealth managers and high-end advisers when they’re speaking to their end-clients, which is one of the biggest challenges that these advisers have faced over the years,” she said.
