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Q&A: Expect more market specialization in secondaries

Pantheon’s Amyn Hassanally expects it to be “another epic year” for secondaries

Amyn Hassanally

Amyn Hassanally (Pantheon photo)

With PE exit routes blocked, both LPs and GPs have increasingly been turning to the secondaries markets to generate liquidity. On the other side of the equation, there have been plenty of willing buyers, as secondaries’ dry powder has climbed to record highs.

Even though exit conditions are expected to improve this year, the growth and evolution of the secondaries markets will continue, argues Amyn Hassanally, global head of private equity secondaries at investment manager Pantheon.

The firm has been active in secondaries investing for more than 30 years and closed its flagship Global Secondaries Fund VII on $3.25 billion at the end of last year.

Hassanally talked to PitchBook about why we should expect to see greater fund specialization, continued market growth and more participation by non-institutional investors in secondaries markets. This interview was edited for length and clarity.

PitchBook: What do you expect the main drivers of activity to be in the secondaries markets this year?

Hassanally: We expect it to be another epic year for secondaries investing. The current supply/demand dynamic is making this a golden period for the strategy.

There is still a tremendous amount of supply coming from both the GP-led side, as well as the traditional LP secondaries side, underpinned by the normal private equity exit routes, like IPOs, M&A etc, all remaining quite challenged.

We speak to a lot of general partners, and although some of them are anticipating big exits in 2024, there is still a lot of uncertainty as to whether market conditions are going to change dramatically.

LPs have continued to bring parts of their portfolio to market to generate liquidity and have been willing to sell at around a 10% discount level for high-quality buyout assets. That is still proving attractive for them to generate liquidity, and on the buy side, it is some of the best pricing in over a decade. Similarly, we continue to see lots of GPs bringing assets to market too. So, the supply side is robust.

On the demand side, we’re seeing growing secondaries fundraising too. We closed a big fund at the end of last year, Lexington Partners just closed the largest-ever secondaries fund, and we expect others to have some large closes this year. All-in-all we feel there is about two years’ worth of dry powder relative to potential buying opportunities, so the supply/demand dynamic is still favoring buyers. We’re in a strong position with a lot of choice.

Valuations, and expectations around pricing, appear to have reached an equilibrium now. Transactions are able to progress with less protracted negotiations on valuation, than was the case in 2022 and the first part of 2023 when there was still a big bid-ask spread.

Do you expect to see further specialization develop in secondaries strategies this year?

We have been seeing a natural maturation and evolution in the secondaries markets, which is mirroring what happened with primary private equity. Most primary private equity funds started life as generalist buyout houses. As that market has matured, we have seen specialization take hold. For instance, today there are certain funds that target big data or healthcare, and that specialization enables them to be more effective in underwriting and valuing assets within those sectors. So, it’s not a surprise that we’re seeing similar specialization within secondaries, such as funds that target infrastructure secondaries or private credit secondaries.

There’s a huge opportunity for infrastructure secondaries and also, I would say, for private credit secondaries, which have a huge white space to fill. If you consider all of the private credit funds raised in the last decade, investors in those funds will need liquidity.

Within private equity secondaries we’ve also seen a lot of specialization, like funds more focused on more traditional LP secondaries. Then you have others, like Pantheon, with our flagship fund, which has a blended 50% GP-led and 50% LP secondaries focus, delivering a blended return. And others that focus only on GP-led deals—we also have a dedicated strategy that does that. There are also funds like us that target the mid-market, while others target large, mega cap assets.

We’re also starting to see NAV lending and preferred equity-focused funds, which can also be placed in the broad secondaries universe. There is a variety of products out there, offering different risk-return and cash flow profiles.

All of that is positive for the ultimate institutional investor because it gives them more control over the composition of their portfolios. Ten to 15 years ago, if you invested into secondaries you were offered a generalist exposure. Today, investors can be more forensic about the kind of cash flow, IRR, and risk exposure they are looking for. And, as funds, we’re not all competing for the same deals, there is space for lots of different strategies to play.

You’ve talked about greater choice for institutional investors, but Pantheon has also been raising capital for its funds from private wealth clients. How important do you see that cohort as a part of your investor base?

The short answer is that it’s very important and a growing part of our investor base. I think that’s increasingly true for a lot of other private equity funds too.

We’ve been developing a proposition around evergreen vehicles, which are semi-liquid and have reasonably low minimum contributions, to better suit this part of the market. These funds can be an attractive proposition for retail investors who historically have been excluded from private equity.

Private equity has had some of the most stable, and outperforming, returns over the last 30 years, so it is likely to be an attractive area for non-institutional investors. This includes secondaries which tend to have a lower risk profile than broader private equity.

We have seen a lot of growth within GP-led secondaries, and particularly continuation funds. What is Pantheon’s focus in that part of the market, and why?

Our main focus is single-asset continuation funds. Our whole strategy is based around solving an age-old problem within private equity. The standard 10-year fund life is kind of an artificial construct, that has created problems for general partners in the past.

If they have star assets they have nurtured for several years that they can see still have more growth potential, that fund structure can mean they have to prematurely sell those assets. It can mean a competitor gets to benefit from those extra returns, based on all the groundwork that they put in—which can be very frustrating for general partners.

The continuation vehicle structure helps those managers to hold onto their trophy assets for longer. It provides more time, and more capital, to maximize value in those companies.

For us, another important part of this is that the returns are not dependent on a market cycle. Star assets will exist in funds regardless of whether it’s a growth period or a recession, and you’re not reliant on there being a boom moment on the one hand, or huge discounts to generate returns on the other. You’re buying into the embedded value of those assets.

We’ve been doing this for over a decade, and since 2018 the market opportunity has really developed, with a high-quality deal flow. We see no reason for that to stop.

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