Private Equity Spotlight: "SI Decade: Why Specialised Secondaries Are Poised for Growth"

Date: May 29, 2024
Host: Adam Ley (PEI Group)
Guests: Jeremy Coller (Coller Capital), Jan Robard (Dawson Partners)

Episode Overview

This episode of Private Equity Spotlight explores the rise of specialization within the private equity secondaries market. Host Adam Ley dives into the forces driving a proliferation of niche secondary investment strategies, how these new specializations are shaping portfolio construction and risk profiles, and what the next decade of private markets could look like. Guests Jeremy Coller and Jan Robard, both seasoned veterans and innovators in the space, discuss their perspectives—sometimes in agreement, sometimes not—on whether the move to more specialized secondaries is essential for future growth, and how the industry is maturing.

Key Discussion Points & Insights

The Evolution of Specialization in Secondaries

• Historical context: The secondaries market has shifted far beyond simply buying stakes in PE funds. There are now funds dedicated to virtually every asset class and niche imaginable (e.g., timberland, agriculture)—a significant evolution since 2014.
  (02:46) Adam Ley: "It's no longer just about buying limited partnership stakes in private equity funds. There are secondaries funds dedicated to every asset class under the sun."

• Drivers of specialization:

  • Asset class maturation: As secondaries mature, they naturally split into sub-asset classes, each with unique risk/return profiles.
  • Investors are seeking targeted exposures and the industry is responding with specialized products.

Successes and Failures in Niche Strategies

• Cautionary tales: Attempts at specialized strategies don’t always succeed. Jeremy Coller recounts their foray into intellectual property (IP) secondaries, which didn’t deliver expected returns.

  • (02:02) Jeremy Coller: "We don't need to go into it, but it has not been a successful secondary strategy for any group, really."

• Latest trends: Big names (Blackstone, Alpinvest, LGT, Lexington Partners) are carving out dedicated vehicles for unique strategies, such as single-asset continuation funds.

The Maturation of the Asset Class

• Benchmarking challenge: As the market fragments, comparing performance becomes complex. Jan Robard pushes for nuanced benchmarking; single-asset continuation funds shouldn’t be measured against broad, traditional secondaries.

  • (04:39) Jan Robard: "At the end of the day what you should have is sub assets classes growing ... and each one of these sub asset classes and secondaries will eventually get benchmarked against each other rather than as a whole industry as itself."

• Portfolio construction: Specialization lets LPs construct portfolios with precise risk and liquidity characteristics, mimicking the progression of public markets and mainstream buyouts.

  • (06:28) Jan Robard: "One of the things happening over this next decade ... is the sub asset classes in the secondaries and how they’re benchmarked over time."

Case Study: Renminbi Secondaries and Private Credit

• Coller Capital’s innovation: Launches dedicated China Renminbi (RMB) fund and private credit secondaries strategy.

  • (07:31) Jeremy Coller: "Secondaries follow primaries ... in both specialization and growth. So we see a huge opportunity in the China vast market and time will tell."

• Demand or Vision? Coller suggests true innovation means anticipating future demand—not just responding to current LP appetite.

  • (08:22) Jeremy Coller: "Vision is the art of seeing the invisible ... You're looking for both a gap in the market and a market in the gap."

The Role of Preferred Equity and Liquidity Solutions

• New tools for LPs: Robard's firm provides preferred equity solutions—a flexible alternative that's “between” debt and equity—to help LPs actively manage their portfolios.

  • (09:11) Jan Robard: "The whole concept of preferred equity is to provide a new tool in the toolset for private equity investors ... but keep the upside and keep the flexibility."

• Comparison to public markets: Robard highlights how public market investors continually rebalance; private equity portfolios must evolve similarly for more sophisticated management.

  • (09:53) Jan Robard: "Imagine a public market investor that ... did nothing with their portfolios for 10 years. You would say that is not an appropriate way of managing your portfolio. That is exactly what is happening in private equity right now."

Benchmarking & Risk-Return in Specialized Secondaries

• Should all secondaries strategies be compared? Coller says yes, with caveats; Robard argues concentrated single-asset GP-led deals require risk-adjusted benchmarking.

  • (10:54) Jeremy Coller: "You have to benchmark single assets against buyouts. It's the right group to put them in."
  • (11:17) Jan Robard: "... that should be a lower risk strategy. And so then it becomes a question of risk adjusted returns ... if continuation funds end up generating similar returns to buyout, then on a risk adjusted basis that's pretty attractive."

• The importance of process and motivation: GP motivation and process integrity are crucial, especially as continuation funds proliferate.

  • (12:21) Jeremy Coller: "The big point is that secondaries is becoming a huge market of interest to all the participants in private equity and it's not going away."

Notable Quotes & Memorable Moments

• On failed IP strategies:
  (02:02) Jeremy Coller: "We bought a number of IP portfolios ... but it has not been a successful secondary strategy for any group, really."

• On sub-asset class benchmarking:
  (04:53) Jan Robard: "... you should have preferred equity LP secondaries, levered LP secondaries, multi asset continuation funds, single asset continuation funds that are all kind of going up a risk return spectrum. No better, no worse, just different risk returns..."

• On innovation in fund creation:
  (08:22) Jeremy Coller: "Vision is the art of seeing the invisible, so you're predicting what people will want ... You're looking for both a gap in the market and a market in the gap."

• On the future of the generic fund:
  (13:58) Jeremy Coller: "Absolutely, because. Yes. That quick."
  (14:05) Jan Robard: "Yes."

• On growth of the secondaries market:
  (14:17) Jan Robard: "Do you get to a trillion dollars by 2031?"
  (14:17) Jeremy Coller: "You get to a lot more than a trillion dollars."

Key Timestamps

• [02:02] Jeremy Coller on failed IP strategies
• [04:39] Jan Robard on benchmarking sub-asset classes
• [07:31] Jeremy Coller on RMB secondaries
• [08:22] Jeremy Coller on anticipating demand vs. responding to appetite
• [09:11] Jan Robard on preferred equity as a liquidity tool
• [09:53] Jan Robard on the need for more active PE portfolio management
• [10:54] Coller/Robard debate on benchmarking
• [13:58] Quickfire: Will generic funds survive?
• [14:17] Market size projections to 2031

Takeaways

• The secondaries market is in a state of rapid evolution, with deepening specialization mirroring the development arcs of public markets and buyout funds.
• Not all niche strategies succeed—innovation requires both vision and testing.
• The next decade is likely to see more sub-asset classes, sophisticated benchmarking, and new liquidity tools, allowing investors to construct portfolios with specific risk-reward and liquidity characteristics.
• Both Coller and Robard agree generic secondaries funds will survive alongside a swelling array of specialized strategies.
• The private equity secondaries market is poised for significant growth, possibly surpassing $1 trillion by 2031, and will increasingly attract attention from all private market participants.

Next Episode Teaser

The series will turn its focus to the gender gap in secondaries, featuring Francesca Perveri of Evercore.

(15:00) Francesca Perveri: "You have many different parties you have to take care of and this requires ... technical expertise ... but also the ability to read the room and be empathic. And I really believe women are particularly good at that and can be successful in making deal happen."

End of summary.