Buyer-led secondaries are coming for real assets

Flush with cash in an increasingly competitive market, secondaries buyers are searching for assets from non-conventional sellers, such as strategics.

For the longest time, the secondaries market has been split into two distinct segments: LP-leds and GP-leds. While both deal types provide liquidity to LPs, the former are initiated by investors, while the latter are initiated by sponsors who are also looking to facilitate a longer hold on assets.

There’s a third type of transaction, however, popping up on desks: the buyer-led deal. In such processes, the transaction is initiated neither by the LP nor by the sponsor; they’re initiated by a secondaries investor. Importantly, they’re being run on assets not held in a traditional fund structure or managed by a general partner.

Flush with cash in an increasingly competitive market, buyers are searching for assets from non-conventional sellers such as asset managers or strategics. The buyers are then proposing to deploy GP-led secondaries technology – such asan SPV – as the buying entity to house the assets.

To the buyer, such a structure differs little from bog standard GP-leds they may back with a traditional fund sponsor. To the asset owners, most of whom are not familiar with GP-led secondaries technology, such a structure provides additional capital in a situation where they may want to invest more equity capital in a portfolio.

“The buyers are instigating the deals because they’re looking in the market saying, ‘That’s an interesting portfolio, we want access to it,’” says a lawyer who has seen such deals come across their desk. The buyers then submit a term sheet that proposes a fund structure to house the assets, and requests that the asset owner continues to manage the assets – as they would in a continuation fund. The vehicle charges a management fee and carry with industry-standard terms.

There appear to be several important drivers behind where and why such deals are happening. For starters, they’re more likely to occur in the real asset space than with corporate PE assets. Sources say this is because, unlike PE, real assets managers have a closer relationship to the underlying assets. A real estate investment professional, for example, is more likely to have a background in direct property management than in corporate finance, one source points out. As such, their peer networks and sourcing channels are more likely to be directly linked to underlying property assets, meaning there is a higher chance that the assets they become aware of sit outside of fund structures.

Another factor is that secondaries capital is inherently passive, and secondaries funds don’t have carte blanche to invest in any type of deal they see fit. This means buyers need to create a fund structure to house assets so they can sit underneath it as a limited partner.

Lastly, buyers are increasingly looking for non-intermediated deals. In a market where your only point of differentiation may be how much you’re willing to pay, a bilateral deal that eschews an auction process can be an attractive way to show off your sourcing prowess to investors.

If the market can crack it on the corporate side, the rise of buyer-led deals means secondaries capital can be exposed to an almost limitless pool of assets currently held outside of traditional fund structures. Of all the theories of how the secondaries market is going to one day reach trillions in deal volume, this presents one of the more credible paths forward.

Adam Le is senior editor, private equity, EMEA at PEI Group. The next episode of 'The

Infrastructure' Investor Podcast, to be published soon, will focus on infrastructure secondaries.