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April 04, 2022

The Evolution of GP-Led Secondaries

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April 04, 2022

The Evolution of GP-Led Secondaries

Market Insights

The Evolution of GP-Led Secondaries

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April 04, 2022


Nash Waterman, Head of Private Markets Secondaries at Morgan Stanley Investment Management, and Boris Secciani, journalist and Head of Research for the Italian publication Fondi&Sicav, discuss the evolving landscape of GP-led secondaries, and why investors should take note. In this Q&A session, the pair address the history of GP-led deals, and how a focus on high performing companies has made the strategy a compelling choice for investors.


How has the secondary deal market in private equity evolved and based on what investment needs?

"This is certainly an interesting question and I am happy to provide my view of the secondary market. To answer, we need to start from a fact: the private equity secondaries industry was born and has evolved to address a myriad of different needs of equally diverse investors.1 The first transactions that fell into the macro-category of secondaries arose to meet two different needs. On the one hand, private equity funds are known to have a well-defined duration (i.e. it has a clear fund term), typically 10 years, with investors (so-called limited partners) having specific and often non-negotiable liquidity needs. On the other hand, managers of such a product (so-called general partners) sometimes need more time to be able to adequately realise the potential value of the assets held. For these reasons, the first secondary transactions took place in the context of so-called internal buy-outs in which existing general partners and new limited partners acquired an existing portfolio in a new vehicle.”

“In the early days of our secondaries program, Morgan Stanley Investment Management’s private secondaries team focused on these deals as well. However, we began to pivot to GP Led deals in the early 2010s and in 2016, moved away from traditional secondaries for what we viewed as the most compelling part of the secondary market, single asset secondaries.

Why do buyers find this opportunity attractive?

"In general, buyers (and many of their LPs) see the distinguishing benefits of secondaries private equity to include faster deployment in a potentially diversified set of investments, shorter duration, potential for attractive IRRs with less of a j-curve.1 I have always believed secondaries have an important benefit that is overlooked: GPs have generally owned these companies for some period of time. These managers have generally passed the higher risk discovery stage that occurs at the beginning of a PE investment. The existing GP and the management team know the company very well at this stage. This dynamic can be hugely beneficial for the secondaries buyers. Secondaries avoid the part of the lifecycle of a private equity investment that we believe is often the riskiest.

While single asset secondaries opportunities were relatively scarce in 2016, we felt the opportunity was so compelling that we shifted our secondaries program to focus on this single asset strategy, with the goal of delivering our clients a market-leading and differentiated secondaries offering.”

In recent years, so-called single-asset secondaries have become very popular. Can you give a few more details about this?

"I love this question because it shows how much the sentiment has changed. As noted, in 2016, single asset secondaries were a little-known investment area and some may have questioned our strategy initially.

In our view, single-asset secondaries address a fundamental natural conflict in private equity. What does a private equity manager do if they find a great business they believe has significant potential for value creation going forward but they have run out of time or resources to pursue that potential within their existing fund?

Should the GP sell the asset and send back the cash to its investors?  Should the GP hold onto the asset and potentially extend their fund life?  Should the GP sell it to their most recent fund?

Private equity investors do not see it all the same way. Some want cash. Some want to hold assets they believe have potential. Some are fine either way. Single asset secondaries provide choices for LPs, who generally can choose to sell or hold.

For buyers, the case for single asset secondaries is relatively simple in my view. I believe GPs more commonly move forward with these transactions for their best companies, creating a positive selection bias from the seller. Furthermore, we can frequently conduct due diligence alongside the owner and the management team-who are STAYING with the business. This small nuance makes a material difference. Both parties are incentivized to be transparent with us because we are partners going forward.

This approach has helped us achieve strong performance with the potential for returns beyond what many investors expect for a secondary fund.2 At Morgan Stanley Investment Management, our goal with our single asset secondary funds is to exceed not only typical secondary fund performance, but also the performance of the PE market in general. Our current Ashbridge II Fund seeks to deliver top quartile returns on an IRR basis, on a multiple of investment capital, and on a DPI basis.

What kind of companies are you most interested in?

"In overall terms, the secondary sector is quite diversified, with groups that specialize in different industry segments requiring a different set of skills.1 In our case, we are interested in companies that provide an essential product or service to a stable end market.

We live in an unpredictable economic environment. We can no longer invest with the comfortable predictability of what many call cycles. As a team, we generally do not consider cycles or cyclicality when choosing our investments. We invest with the assumption that there will be a continuous set of surprise economic shocks that will challenge certain industries, certain countries, and sometimes the global economy. For many of us, we view our careers as having been an ongoing set of economic crises with pauses in between. We seek to prepare for that reality and take advantage when investing”.

There are increasing concerns about the continuation of a higher inflation rate and thus, at least in the medium term, a higher cost of money. Do you fear such developments? Do you think that the private equity industry, which is often characterised by a high degree of leverage, will face difficult times?

"We believe a minimal amount of inflation is good for the economy and the markets. It is no coincidence that over the last decade the monetary authorities have gone to great lengths to try to stimulate it. In the long run, the effects of having interest rates at or below zero are probably more negative than positive in our view.

That said, excessive leverage will be a problem for many companies in a rising rate environment and is a risk that we seek to minimise within our Ashbridge II Fund.


1 Diversification does not eliminate the risk of loss.
2 Past performance is not indicative of future results.


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