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The French Riviera isn't exactly known for its thriving secondaries industry. In this paradise like corner of the world where painters including Cezanne, Monet, Matisse and Picasso have flocked to over the years for its light and warm climate, and where celebrity spotting can be somewhat of a sport during the summer months, life is stress free and pretty good. It's also here that a niche secondaries firm called BECS Capital has its headquarters. BECS isn't your typical secondaries firm. It doesn't just buy second hand stakes in private equity funds. It specializes in acquiring second hand stakes in funds of funds and, wait for it, other secondaries funds. Is your mind blown? I'm Adam Ley, a senior editor at PEI Group and editor of Secondaries Investor. Welcome to our Decade of Secondaries Investing miniseries. This is episode 7, why Specialized Secondaries Are Poised for Growth. We're going to take a look at.
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The topic of specialization in secondaries and.
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We'Ll dig into why the last 10 years has seen a proliferation of fund strategies focusing on different asset classes and niches. We'll also discuss whether increasing specialization is the only way forward and what this means for the overall growth of the secondaries market. To answer these questions, I sat down with two old friends of the show. Jeremy Collar, founder and CIO of Koller.
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Capital, one of the secondaries market's oldest.
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Investment firms, and Jan Robard, who established.
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Canada Pension Plan Investment Board Secondaries Group and who went on to found Dawson Partners, a specialist firm focusing on preferred equity and what it refers to as structured liquidity offerings in private markets.
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We spoke about specialization for a long time and the pair didn't agree on everything. You'll hear some of that in this episode. What struck me as fascinating was that the history of secondaries is probably littered with niche strategies that have tried and failed. Have you ever heard of intellectual property secondaries? I didn't think so. Here's Jeremy Collar.
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We started buying corporate venture portfolios, so we bought Bell Labs Incubator, we bought British Telecoms Incubator, but then we thought we made a lot of money on that and we thought, well, you know, well, why not go down to intellectual property? So we bought Philips MPEG Technology and Screen Technology IP Portfolio and we bought a number of IP portfolios with the idea that, you know, you would sell them to foreign companies or competitors so they would have their own war chests, etc. You know, but actually you either litigate or develop the products. We don't need to go into it, but it has not been a successful secondary strategy for any group, really.
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Okay, so intellectual property secondaries is probably not going to win any awards for New Strategy of the Year at the next P.E.I. awards. And yet plenty of secondaries firms have been increasingly separating their investment strategies into dedicated specialist funds, as Secondaries Investor has explored in various articles in recent years. You can find these articles@secondariesinvestor.com Firms including Blackstone Strategic Partners, Alpinvest Partners and LGT Capital Partners have all carved out separate strategies from their main funds and have launched dedicated vehicles over the past year and a half. Most recently, Lexington Partners, which is one of the secondaries market's biggest investment firms, said it was setting up a dedicated strategy to invest in single asset continuation funds. The secondaries market of today looks very different to how it did in 2014. 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, from the larger asset classes of real estate and infrastructure to the niche ones like timberland and agriculture investing. According to data compiled by secondaries investor, 85% of the capital raised for secondary's.
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Funds in final closes last year was for private equity strategies, but the remainder of this was for non private equity strategies and the year before that more.
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Than one third of capital raised was.
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For non PE strategies.
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Even within private equity secondaries itself there is specialisation. There are secondaries funds set up to invest solely in healthcare assets or in impact funds and assets. So what's driving this trend? Are secondaries fund managers simply getting bored of raising and deploying capital in the traditional way? Or is the secondaries market really maturing to a point where investors are increasingly keen to back and benefit from increasingly specialized strategies, each with their own unique risk reward profile?
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Here's Jan Robart I think what specialization is doing is the maturation of the asset class. And to your point, there are so many different ways that secondaries can kind of play into even esoteric asset class which is going to continue the growth.
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Of this particular market to the trillion by 2031.
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But more importantly, the funny thing is that if you think about buyout, it's not like you benchmark a buyout and you are going to put mezzanine up against vc. Buyout matured to a point where there was sub asset classes. You have praf, you have mid market buyout, you've got large buyout mega, you've got growth venture capital and they're all benchmarked in different ways. Why? Because they're all different risk returns. So imagine the secondary market that now has created all of these sub asset classes that are getting benchmarked in the same way. That's not right. At the end of the day what you should have is sub assets classes growing. 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 at the end of the day. And every LP is going to start thinking about what is it that their portfolio construction needs, what's the risk return that they need for their portfolio construction. 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.
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Robart says that as this begins to happen and sub asset classes mature in their own right, more capital will flow into them because investors can construct portfolios around them.
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I think one of the things that is happening over this next decade, the decade of capitalization, is the sub asset classes in the secondaries and how they're benchmarked over time.
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In other words, replicating the public markets.
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Or replicated even buyout. I mean you're right, public, then buyout, then secondaries. It's on the same journey.
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You just need the markets to be wide and deep enough and then you can organize the risk reward based on.
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That and you need the specialization. So you start with a creation of an, of an asset class that to your point was multi strat in one fund and then all of a sudden you start ending up with different strategies and that allows LPs to be more thoughtful in terms of how they construct their portfolio in this asset class itself because it itself has sub asset classes.
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Now I particularly invited Collar and Robard onto this episode not just because both are secondaries market veterans in their own.
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Right, but because they've both created specialized.
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Products outside of the tradition plain vanilla secondaries fund. Koller Capital for example, has launched a dedicated strategy focusing on private credit secondaries and another on Renminbi Secondaries, a Chinese yuan denominated fund that acquires RMB denominated.
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Second hand fund stakes.
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The primary China private equity market really took off 10 years ago in 2014 and as we said before, there's now an accumulated large stockpile of assets that that has a strong need for liquidity. So you know, as I've always been saying, secondaries follow primaries, you know, in both specialization and growth. So we see a huge opportunity in the China vast market and time will tell.
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Time will tell. Indeed, Cola Capital wants to raise 1.5 billion yuan for its debut Renminbi fund. That's roughly just over $200 million US as of this year, the firm had held a first close on the fund, though it's unclear how much it has raised so far. Did Collar Capital decide to launch this.
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Strategy in response to LP Appetite, or.
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Was it the other way around?
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Vision is the art of seeing the invisible, so you're predicting what people will want. You know the old adage of Ford if he asked people what they wanted, they'd say, a faster horse. You're looking for both a gap in the market and a market in the gap.
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Robard, on the other hand, views private.
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Equity as another way to open up options to investors in private equity. To him, private equity investors should be able to tweak their portfolios in the same way that public market investors do, I should say. For anyone needing a refresher course in what preferred equity is and how it can be applied to the private equity market, there's an episode of the P.E.I. spotlight podcast on this very topic. Just look for the episode everything you wanted to know about preferred equity in the P.E.I. spotlight podcast feed. Here's Jan again.
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From our perspective, the whole concept of preferred equity is to provide a new tool in the toolset for private equity investors that are looking to generate liquidity on their private equity portfolios. It allows them to essentially accelerate liquidity on their private equity portfolios, but keep the upside and keep the flexibility.
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So it's meant to sit somewhere between the debt and the equity and provide another tool in the tool set for.
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People to tactically reallocate their private equity portfolios.
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And what I would say is that we're not here to replace debt, we're.
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Not here to replace equity.
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We're here to give more options in the toolset for investors that are becoming increasingly more sophisticated in how they're managing.
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Their private equity portfolios.
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Imagine a public market investor that invested in the public markets and then did nothing with their portfolios for 10 years, did not tactically reallocate, did not rebalance. Let the public markets just choose for themselves. You would say that that is not.
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An appropriate way of managing your portfolio.
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That is exactly what is happening in.
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Private equity right now.
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You commit to a fund and you commit and hold, and you don't tactically reallocate your private equity portfolios as it.
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Has been built in different ways, reacted.
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In different ways to markets, and essentially has had its own unique characteristics, Robart says.
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The next decade of private markets will be one where LPs are going to become increasingly sophisticated in how they manage their private equity books. As secondary strategies become more specialised, the question of how they should be benchmarked has come to the fore. Should a traditional diversified secondaries fund that acquires limited partnership fund stakes be measured against the same yardstick that a GP led secondaries fund that invests in concentrated exposures to single companies is?
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I think they have to be. You have to benchmark single assets against buyouts. It's the right group to put them in.
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So I would say yes, with a twist. And the twist is that, you know, generally speaking, in continuation vehicles, the one risk that you have in buying an.
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Asset in private equity is what did you buy? And usually figure that out in the first 100 days.
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In continuation vehicles, that risk goes away. And so the manager that is moving an asset from one fund to another knows that asset well, has spent time.
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With the management team, understands that strategy.
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And therefore that should be a lower risk strategy. And so then it becomes a question of risk adjusted returns. You know, if continuation funds ends up generating similar returns to buyout, then on.
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A risk adjusted basis, that's pretty attractive.
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Because time will tell as this industry matures. But there should be lower loss ratios and there should be lower volatility if that thesis plays out.
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Right.
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And so then the question is, as the maturity of this industry goes, do you accept lower returns because it's less risky? Or maybe the flip side of that.
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Is that you're getting similar returns but with less risk.
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Right.
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So that's the story that's yet to be told. And that will happen as track records.
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Mature in this sub asset class.
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I think, Jan, speaking about an idealized world, because GPs know the assets better and the question is that investors have to navigate is the motivation of the gp. You know, the GP has the fiduciary responsibility to maximize returns for investors.
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Absolutely.
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Not for the buyer.
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Absolutely.
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But I'm not talking about the. I'm not talking about. So let's be very clear here.
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I'm talking about, you know, the knowledge.
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Of the company, so it's the risk.
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Rather than the return.
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Right. But if the fund hasn't got a big enough dpi, you know, we're in a market where there isn't much DPI at the moment and they've got, you know, the motivation of the GP should be to maximize the returns for investors.
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Absolutely. No doubt. I agree with you completely. I agree with you completely.
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And so it has to be right.
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Process, right structure, right mindset. In everything that's getting done in this industry.
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That's why you need a really good Secondaries GP to navigate that.
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I would also add that's why you need a really good specialist trade publication to navigate that.
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One with a highly specialized and dedicated editorial team that understands the market and that is fair and transparent and holds the highest ethics of journalism as well. I'm sure you know where I'm going with this.
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At the end of the discussion, I asked Jeremy and Jan for their thoughts on the market's future. In 10 seconds, both of you Will the Generic Secondaries Fund still exist in 10 years time? Jeremy?
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Absolutely, because. Yes. That quick.
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Yes.
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Jeremy, if we define secondaries as all.
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Of the sub asset classes private credit, real estate infrastructure, private equity, NAV lending, preferred equity, GP stakes, do you get to a trillion dollars by 2031?
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You get to a lot more than a trillion dollars.
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Wow.
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You heard it here first.
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But 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.
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In the next episode, PEI Americas correspondent Hannah Zhang looks at the gender gap in secondaries and how this industry can create a more supportive environment for women.
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So you have many different parties you have to take care of and this requires obviously technical expertise and technical capabilities, 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 things happen and making deal happen.
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That's Francesca Perveri, senior managing director at Evercore on the next episode of the Decade of Secondary's Investing miniseries. The production editor on this miniseries was Evie Russman and our audio editor is Eric Fish. For PEI and Secondaries Investor, I'm Adam Ley.
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Thanks for listening.