We held a webinar on private credit and niche secondaries on 26th May, together with Dorchester Capital Advisors LLC. Secondary markets (i.e transactions of unlisted assets) have been around for 20 years or so but have developed very significantly in the past few years. Dorchester’s Jason Gabrielli (Director in Operations and Research) and Rob Johnson (Head of Origination) took our audience through what has been happening and how they underwrite assets when purchasing them for Dorchester’s secondary funds.
Traditionally, the secondary markets have largely been about investors wishing to sell LP assets, in the case of credit or hedge funds quite often because they are in some way impaired. The great bulk of volume has been in buy-out private equity, reflecting the dominance of that segment in private markets. Jason explained how Dorchester has, since the Global Financial Crisis, established a reputation by purchasing, restructuring or financing assets in other alternative markets such as private credit and hedge funds. These markets are far less mature or developed than private equity markets, and the underlying structures are therefore more varied and often more complex.
Part of the growth in private markets has come as investors have hunted for income in less liquid markets. While private equity still accounts for around 60% of the $8trillion total primary market, real estate, infrastructure, and private debt, now each account for approximately $1 trillion each. Secondary markets, whether measured by transaction volume (86%), dry powder (86%) or fund raising plans (76%) are even more concentrated on private equity (source Preqin). Moreover, the dry powder is largely concentrated in the largest funds, whose interest is only in bigger deals.
A second major trend is the growth of GP-led transactions. These can happen as organisations change their priorities, whether because of new management, new strategy, or some other reason, and re-evaluate their portfolios. Or it may be a need for liquidity on assets as funds reach the end of their lives and GPs need solutions for the remaining assets. GP-led transactions now account for 45% of total secondaries (source Evercore, Greenhill), and this proportion is likely to grow. One consequence of this has been greater acceptance of secondary markets as a way of transacting private assets generally, and not just those which are impaired.
Dorchester is active in niche areas which are outside the mainstream by virtue of their smaller size, greater complexity, lower transparency, or underlying assets. Rob explained how Dorchester approach underwriting them, which requires an uncommon combination of skillsets. Some of the prerequisites are good relationships with the GPS involved, the ability to analyse credit situations where information may not be perfect, and a mandate sufficiently broad to cover complex situations.
He used an example where Dorchester bid jointly on a $200m portfolio of 25 fund interests covering both equity and credit together with a PE buyer. The PE buyer was unable to purchase the credit, and the combined bid provided the seller with better execution and pricing, helped by Dorchester’s relationship and understanding of the major GPs involved.
Jason and Rob then fielded questions, including the use of advisors, how LPs can raise finance without selling the assets, the reasons behind the growth of GP-led transactions, pricing, and whether the entry of larger players will change this market.
If you would like to see the slides or to hear the transcript, please contact Sophie Gioanni by email (sophie@linchpin-advisory.com) or phone (+44 7923 246 376).