Secondaries Gaining Ground Fast

Anna Ellis: So perhaps, Alex, let's pivot a little bit. Another topic that has been extremely prevalent over the last couple of years has been secondaries. We've spoken a lot about it and how the dynamics around the lack of liquidity, slower exits and a slower fundraising market. But GP is wanting to get out and fundraise, has created great opportunities for secondaries. I'm just keen to understand, are they still attractive? What are you seeing when it comes to secondaries?

Alex Tandl: Yeah, sure. So maybe if we start at the top and maybe try and frame just how big the opportunity and how quickly it's growing. Obviously hard numbers are hard to come by, but triangulate in a couple of different sources.

The broader PE AUM has grown from maybe $2-$2.5 trillion 10 years ago to $5-$5.5 trillion dollars today, right? So that's a growth rate of around 10% a year.

And contrast that to secondaries around 10 years ago that was around $20 billion and today that's around $100 - $120 billion, right? So that's a growth rate of a growth rate of around 20% CARG.

You put those two numbers together and the penetration of secondaries within the broader context of your private equity AUM. The $120 today versus the $5-5.5 trillion that's around 2% versus maybe 1% 10 years ago.

So by all measures it's growing twice as fast as the broader PE landscape, and penetration is increasing it's doubled, but it's still a relatively small proportion of overall AUM and deal flow in in the sector.

So I think to your question, what is driving it? Is it going to continue?

My views on this is it's really if you think about the innovations within private capital, secondaries is one of those innovations that is genuinely valuable to both GPs and GPs and LPs. And so what we're seeing is a confluence of both demand and supply led interest in these assets.

So if you think about the supply side, it's really a story about liquidity. And in this case it's both LP and GP led liquidity.

So in the Australian institutional context, we've spoken a lot even just today, but in previous discussions around the lack of DPI in the current environment. I think if you think back to 2010 to 2020-2021 LP's were running at a cash yield distributions of around 20 plus percent. So I think the challenge for them back then was how do you stay deployed, right? They're getting a lot of money back.

Roll forward to 2021-2022 onwards and that's running at 9 or 10%. And so they've got the exact opposite challenge now. And so it's really about how do you generate liquidity. So you're seeing a lot of LP led secondaries in terms of getting some DPI and generating liquidity.

And what's really interesting here, I think, which is quite different from the way in which secondaries grew up, I guess really is a niche perhaps for distressed assets is you're getting, you're seeing a lot of GPs that are leading secondaries themselves.

You know, these tend to be called continuation vehicles and here you're seeing a lot of GPs that are actually focused on the crown jewels, so to speak. And so this ride the winner strategy is something that we've really seen in the past couple of years where you've got GPs that own these assets.

So known industries, known management teams and they want to go again for another five years because they see the opportunity ahead.

Anna Ellis: Makes sense. Like you're in it, you know it.

Alex Tandl: Absolutely right. So it's one of these things that really makes sense. And so investors on both sides of the transaction, so to speak, are willing to enter into a trade.

The other driver, which I think is probably well known, but we'd be remiss not to touch on as the denominator effect. So as we see revaluations in particular in listed asset classes and obviously there's been some gyrations of late, institutional capital needs to rebalance their portfolio. So that's another driver of secondary transactions.

And then in the Australian context, a driver over the past, the big driver over the past couple of years has been the consolidation within the superannuation industry.

So if you think about a smaller superannuation fund, they may run a private equity portfolio of a couple hundred million dollars. They merge into one of the really large superannuation funds and now suddenly they're diversified PE portfolio of a couple hundred underlying investments is now the same size as one single check size. And so you'll see what they'll do is they'll look to clean up the portfolio and there'll be lots of opportunities for secondaries there.

I think the other important side is the demand side. And so you've got investors that are really interested in secondaries mainly for two reasons.

I think one is really around pace of deployment and so contrast secondaries to a typical at call closed end private equity fund where you're making a commitment to private equity, you're not actually investing in private equity because it may take you several years for that capital to be called, by which point the landscape may have changed significantly.

A secondary on the other hand, is an opportunity to generally invest maybe not 100 cents in the dollar, but 80 to 100 cents in the dollar out of the gates. And you know what you're getting exposure to.

And then the other one is really around diversification.

So if you're trying to build a private equity portfolio, it can take many, many years to get set. And so secondaries are often opportunity to get a lot of diversification, whether that's by vintage, which you know is important for returns through the cycle, by manager and by industry.

So I think they're a couple of reasons that we've continued to see secondaries be a real driver of growth in the industry. And I think by some accounts it'll double again by 2030.

And so there aren't that many industries where you see 20% compound growth rates over a long period of time. But secondaries is one of those.

Anna Ellis: continuing to mature every time we talk about it. And there was an interesting thing that you mentioned there because it sounded like there's a lot of institutional investors that are actually leading the secondary side.

Traditionally some people think that it's the institutional investors that are actually investing or buying. So who else is out there? Whose buying?

Alex Tandl: Yeah. So I think often when people talk about secondaries, they talk a lot about the resurgence of high net worth and private wealth capital in the private equity industry.

I think two stats that come to mind in the Australian context, I think by volume now by count, 40% of investors in private capital in Australia are private wealth or high net worth of all family offices. That's increased fourfold over the past couple of years. The more relevant metric of course is value of investment rather than the number of investors. And so that's increased I think around threefold. It's up to 23% today with the balance being institutional investors, right.

So that's a very big increase.

I think the obvious question there is, well, why is that? What's driving it?

I think if you if you try and unpack that, the first is I mean the appeal of the asset class. I think to everyone here that should be pretty obvious as to why private capital and private equity in particular is an attractive asset class.

You know superior long term returns relative to list of another asset classes over a very long period of time. Quite diversified industry exposure relative to listed markets, I mean, I think I haven't looked at the numbers today, but if you think about the US context, 30 or 40% of the S&P 500 is just the MAG 7.And so it's a very, very concentrated, concentrated bet.

And then private equities tends to be uncorrelated to other asset classes. So I think that's been true for a long time. That continues to be true. I can see why they want to invest in the asset class.

So I think the explanatory variable here as to why we're seeing it now is really more around access. And so for a long time, private equity was really only accessible to institutional capital. And a lot of that is to do with the at call capital construct that we've spoken about. I mean, also minimum check sizes.

And so evolutions within the industry, in particular evergreen funds, for example, mean that the asset class is suddenly accessible to a much broader universe of universe of investors.

You know, I think if, if I was asked to make a prediction or place a bet, it'd probably be that we're going to see a lot of appetite for evergreen funds going forward. Like if you just think about it at the highest level, what are some of the features of an evergreen fund? It's an upfront commitment. There's no, there's no at call component. So you're not managing capital call commitments, you're getting access to a diversified portfolio from day one. And in pretty much all the cases that we're seeing in the market, there's access to liquidity as well.

So for a high net worth or a private wealth investor that is certainly getting set in an asset class for the first time, that's really attractive.

So I think that we're going to see evergreen funds continue to gain in popularity over the next couple of years.

Anna Ellis: Certainly, I think I've heard Mike call it the democratisation of private equity. So I think that sounds like what you've just described.