Insights
A Parting of the Ways
|
|
Alternatives
|
• |
March 13, 2025
|
A Parting of the Ways
|
March 13, 2025
|
A Parting of the Ways
A Parting of the Ways |
|
New pricing patterns and rising competitiveness are helping to distinguish GP-leds from the LP-led side of the market, says Morgan Stanley Investment Management’s Nash Waterman
From a competitive standpoint, how has the GP-led secondaries market developed?
We have seen a significant number of new entrants in recent years, both those reallocating capital towards these transactions and, to a lesser extent, entirely new institutions. This has led to an increase in competition, but only around the big, brand-name GPs that are bringing deals to market.
The reason that these big brands have such a gravitational pull is that a lot of the secondaries groups now pursuing GP-leds started out doing traditional LP-led transactions. Those LP trades were inevitably dominated by the largest funds. Secondaries firms have therefore come to know those managers well and can price those interests efficiently.
That same mentality has now moved to the GP-led side of the market too, where there is also a strong preference for the big-name GPs that secondaries houses are so familiar with. Those deals have therefore become more competitive. That doesn’t mean that pricing has gone up materially, but it does mean that those GPs can set their own terms and set the timeframe in which they want to complete, which may be as short as three or four weeks.
That contrasts sharply with the mid-market and lower mid-market, where there is a much longer list of names, and the firms are generally not as well known. We have seen a reticence to work with these GPs among many secondaries groups. They may be very strong managers with great assets, but it is still harder for them to get transactions done. More and more of these managers are turning to the GP-led secondaries market, but the competitive intensity in that space remains unchanged.
What evolution have you seen in the types of GP-led deals coming to market?
GP-leds can take many different forms, beyond the conventional continuation vehicle. For example, there are situations where a GP-led opportunity may be structured around a single co-investor that is looking to sell. In that situation, the LPs in the fund don’t necessarily need to get involved in the process.
We also see instances where public companies that still exist in private equity portfolios are being taken private again. This trend has become particularly prominent, as many mid-market companies that held IPOs in 2021 and early 2022 have fallen out of favour. Often, these companies were sold out of major passive index funds and simply didn’t get the attention they needed in terms of equity research. We have therefore started to see a big divergence between their financial performance and stock price due to a lack of trading.
Furthermore, the cost of being a public company can be onerous if you are fairly small. These businesses are therefore better equipped to operate as private companies where there is clear alignment between owner and management team. GP-led secondaries deals can be used as a way to capture the value creation opportunity that these companies can represent.
Another example involves GPs that are looking to complete a large strategic acquisition but that don’t have the capital remaining in the fund to do so, or else have hit portfolio concentration limits. GP-led secondaries investors can provide that capital and take ownership of the business in that way. These transactions are attractive because the acquisitions concerned are often transformational, thereby providing a unique and compelling entry point.
Finally, GP-led secondaries deals are occasionally used to de-lever overlevered portfolio companies. Sometimes you see promising companies with inappropriate balance sheets. Providing capital to these businesses so that they have an appropriate capital structure may pave the way for value creation going forward.
How attractive would you say pricing is today?
Over the past two years, the combination of a growing awareness of GP-led deals and an environment where it has been very hard to achieve liquidity has brought a set of extremely high-quality assets to the market. However, because there hasn’t been enough buyside demand to meet the level of supply, that hasn’t led to an increase in pricing. I don’t see that changing. The desire of GPs to complete these deals still outstrips the capital available. As long as that remains the case, we may continue to find great value.
What is considered best practice when it comes to running these GP-led processes?
What is most important is ensuring that there is transparency for investors in terms of how the company is being valued and why that valuation is being struck. That puts those investors in the best possible position when it comes to deciding whether to sell or roll. There shouldn’t be any surprises.
It is also incumbent on all market participants to ensure these deals are being done for the right reasons. You don’t want to see situations where a GP-led deal takes place and then the company is sold for double that price a few months later. As a new buyer, we need to be aligned with rolling LPs around a long-term value creation opportunity, not quick value extraction.
How is the market defining pricing for GP-led deals?
Secondaries pricing is typically communicated in terms of a percentage of NAV, but that can have very little connection with reality, particularly in a GP-led context. You see data that shows GP-leds are generally being completed at 90-100 percent of NAV, and the inference is often that the market has become competitive, and pricing is high.
But the reality is that it depends on how these deals are structured. A deal may be priced at 100 percent of NAV, but if the deal is being structured around new capital to fund an acquisition, the company might be worth a lot more once that deal has taken place. Equally, if a business is growing very quickly, the pricing of a deal struck at 95 percent of NAV may look very different by the time that deal even closes.
The fact that secondaries market pricing revolves around a percentage of NAV is problematic, particularly for GP-leds. The emphasis should be on the valuation that is being paid, as it is in direct buyouts, not on how that relates to the last accounting value. It will be interesting to see if the GP-led market eventually starts presenting pricing that way.
What are the key ingredients that make up a good GP-led deal?
It starts with the asset. GP-led secondaries investors need to see assets that have performed well and that have the ability to continue to perform in the same way. That means they want to see management teams and GPs that do not need to do anything extraordinarily different in order for the business to grow in value.
One of the key advantages of these transactions is that you have the ability to see what the management team and sponsor have done with the business. That history should give you confidence about what lies ahead.
Alignment is also critical. You want to see that a GP is putting fresh capital into the deal. You also need to consider when these transactions are being done in the lifecycle of the GP. There have been situations where sponsors have used the GP-led market opportunistically to get liquidity for assets that they have not been able to find elsewhere. We have also seen situations where sponsors have used the market to try and save a company that is struggling.
What we want to see is that a GP-led deal will be meaningful to the sponsor going forward. We want to know that they will continue to hold significant ownership in one of their funds and hopefully their most recent fund, so that it is important to their franchise and not just to the continuation vehicle. That means we want the deal to be somewhere in the top 10, in terms of AUM. Ultimately, you want to be convinced that a sponsor is doing this because they believe they have a great company with a great future.
To what extent do you expect to see the LP-led and GP-led secondaries markets diverging and becoming distinct asset classes?
It is really just an accident of history that secondaries firms are doing both LP-led and GP-led secondaries deals. They are drastically different investment practices. With LP-led secondaries, you are pricing large numbers of funds and companies at once, and you generally have to price the transactions very quickly. In most cases, the portfolios are so diversified that you don’t have the time, or even the necessity, to dig deeply into each business. GP-led deals, and single asset GP-led deals in particular, are much more concentrated bets and the due diligence required is more akin to that done in the direct buyout world than it is to LP-led secondaries.
I believe, therefore, that clients will start demanding to invest in funds that either focus exclusively on LP- or GP-led deals, in part because the exposures are fundamentally different in terms of risk-return profile, and also because the skills required are so different. Having one team do both just isn’t logical. It is akin to a mutual fund saying it wants to pursue both public equities and public bonds. They are totally different strategies and don’t fit naturally within the same vehicle.
|
Partner, Head of the Morgan Stanley Private Equity Secondaries Team
Morgan Stanley Private Equity Secondaries
|
From the March 2025 GP-Led Secondaries Special Report
From the March 2025 GP-Led Secondaries Special Report
This communication contains content created by separate affiliated entities of Morgan Stanley Investment Management (MSIM) including the Morgan Stanley Research Department, Morgan Stanley & Co. LLC, Morgan Stanley & Co. International PLC, Morgan Stanley MUFG Securities Co., Ltd, Morgan Stanley Capital Group Inc. and/or Morgan Stanley Asia Limited. MSIM does not create research reports in any form. MSIM does not endorse any opinions expressed in the email. The content does not constitute an investment recommendation of MSIM, and the affiliated entities are not acting as investment advisers to any person in connection with publication of such research. Morgan Stanley Research does not undertake to advise you of changes in the opinions or information set forth in these materials. The research is made available to clients solely for informational purposes.
The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. This is a general communication, which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
Forecasts and/or estimates provided herein are subject to change and may not actually come to pass.
This general communication, which is not impartial, is for informational and educational purposes only, not a recommendation. Information does not address financial objectives, situation or specific needs of individual investors.
All investing involves risks, including a loss of principal. Alternative investments are speculative and involve a high degree of risk. These investments are designed for investors who understand and are willing to accept these risks. Performance may be volatile, and an investor could lose all or a substantial portion of his or her investment.
Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results.
Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.
This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.
This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.
Morgan Stanley Research does not undertake to advise you of changes in the opinions or information set forth in these materials. The research is made available to clients solely for informational purposes.
The statements above reflect the opinions and views of the Morgan Stanley Private Equity Secondaries team as of the date hereof and not as of any future date and will not be updated or supplemented. All forecasts are speculative, subject to change at any time and may not come to pass due to economic and market conditions.
By accepting this document, you agree that such document (including any data, analysis, conclusions or other information contained herein provided by the Morgan Stanley Private Equity Secondaries team in connection herewith) may not be reproduced or otherwise shared or distributed to any other persons, in whole or in part, without the prior consent of a Morgan Stanley Private Equity Secondaries team representative.
The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the firm offers. Keep in mind that forecasts are inherently limited and should not be relied upon as an indicator of future performance. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. They should not be construed as recommendations, but as an illustration of broader economic themes.
Information regarding expected market returns and market outlooks is based on the research, analysis, and opinions of the investment team of the Morgan Stanley Private Equity Secondaries team. These conclusions are speculative in nature, may not come to pass, and are not intended to predict the future of any specific Morgan Stanley investment.
Certain information contained herein constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” continue” or “believe” or the negatives thereof or other variations thereon or other comparable terminology. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. No representation or warranty is made as to future performance or such forward-looking statements.
There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. This piece has been prepared solely for informational purposes and is not an offer, or a solicitation of an offer, to buy or sell any security or instrument or to participate in any trading strategy. The material contained herein has not been based on a consideration of any individual recipient circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, the recipient should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or respect thereto.
Persons considering an alternative investment should refer to the specific investment’s offering documentation, which will fully describe the specific risks and considerations associated with such investment.
Alternative investments typically have higher fees and expenses than other investment vehicles, and such fees and expenses will lower returns achieved by investors. Funds of funds often have a higher fee structure than single manager funds as a result of the additional layer of fees. Alternative investment funds are often unregulated, are not subject to the same regulatory requirements as mutual funds, and are not required to provide periodic pricing or valuation information to investors. The investment strategies described in the preceding pages may not be suitable for the recipient’s specific circumstances; accordingly, you should consult your own tax, legal or other advisors, both at the outset of any transaction and on an ongoing basis, to determine such suitability.
Risks Relating to Private Equity Investments. Certain funds will typically invest in securities, instruments and assets that are not, and are not expected to become, publicly traded and therefore may require a substantial length of time to realize a return or fully liquidate. The respective general partners cannot provide assurance that they will be able to identify, choose, make or realize investments of the type targeted for their fund, or that such fund will be able to invest fully its committed capital. There can be no assurance that a fund will be able to generate returns for its investors or that returns will be commensurate with the risks of the investments within such fund’s investment objectives. The business of identifying and structuring investments of the types contemplated by these funds is competitive and involves a high degree of uncertainty. In addition to competition from other investors, the availability of investment opportunities generally will be subject to market conditions as well as, in many cases, the prevailing regulatory or political climate. In addition, investments in infrastructure may be subject to a variety of legal risks, including environmental issues, land expropriation and other property-related claims, industrial action and legal action from special interest groups.
This is prepared for sophisticated investors who are capable of understanding the risks associated with the investments described herein and may not be appropriate for the recipient. No investment should be made without proper consideration of the risks and advice from your tax, accounting, legal or other advisors as you deem appropriate.
Morgan Stanley does not render tax advice on tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used with any taxpayer, for the purpose of avoiding penalties which may be imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws are complex and constantly changing. Clients should always consult with a legal or tax advisor for information concerning their individual situation.
DISTRIBUTION
This material is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.
MSIM, the asset management division of Morgan Stanley (NYSE: MS), and its affiliates have arrangements in place to market each other’s products and services. Each MSIM affiliate is regulated as appropriate in the jurisdiction it operates. MSIM’s affiliates are: Eaton Vance Management (International) Limited, Eaton Vance Advisers International Ltd, Calvert Research and Management, Eaton Vance Management, Parametric Portfolio Associates LLC, and Atlanta Capital Management LLC.
This material has been issued by any one or more of the following entities:
EMEA
This material is for Professional Clients/Accredited Investors only.
In the EU, MSIM and Eaton Vance materials are issued by MSIM Fund Management (Ireland) Limited (“FMIL”). FMIL is regulated by the Central Bank of Ireland and is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at 24-26 City Quay, Dublin 2, DO2 NY19, Ireland.
Outside the EU, MSIM materials are issued by Morgan Stanley Investment Management Limited (MSIM Ltd) is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.
In Switzerland, MSIM materials are issued by Morgan Stanley & Co. International plc, London (Zurich Branch) Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland.
Outside the US and EU, Eaton Vance materials are issued by Eaton Vance Management (International) Limited (“EVMI”) 125 Old Broad Street, London, EC2N 1AR, UK, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority.
Italy: MSIM FMIL (Milan Branch), (Sede Secondaria di Milano) Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy. The Netherlands: MSIM FMIL (Amsterdam Branch), Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. France: MSIM FMIL (Paris Branch), 61 rue de Monceau 75008 Paris, France. Spain: MSIM FMIL (Madrid Branch), Calle Serrano 55, 28006, Madrid, Spain. Germany: MSIM FMIL Frankfurt Branch, Große Gallusstraße 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Denmark: MSIM FMIL (Copenhagen Branch), Gorrissen Federspiel, Axel Towers, Axeltorv2, 1609 Copenhagen V, Denmark.
MIDDLE EAST
Dubai: MSIM Ltd (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158).
This document is distributed in the Dubai International Financial Centre by Morgan Stanley Investment Management Limited (Representative Office), an entity regulated by the Dubai Financial Services Authority (“DFSA”). It is intended for use by professional clients and market counterparties only. This document is not intended for distribution to retail clients, and retail clients should not act upon the information contained in this document.
This document relates to a financial product which is not subject to any form of regulation or approval by the DFSA. The DFSA has no responsibility for reviewing or verifying any documents in connection with this financial product. Accordingly, the DFSA has not approved this document or any other associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it. The financial product to which this document relates may be illiquid and/or subject to restrictions on its resale or transfer. Prospective purchasers should conduct their own due diligence on the financial product. If you do not understand the contents of this document, you should consult an authorised financial adviser.
U.S.
NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT
Latin America (Brazil, Chile Colombia, Mexico, Peru, and Uruguay)
This material is for use with an institutional investor or a qualified investor only. All information contained herein is confidential and is for the exclusive use and review of the intended addressee, and may not be passed on to any third party. This material is provided for informational purposes only and does not constitute a public offering, solicitation or recommendation to buy or sell for any product, service, security and/or strategy. A decision to invest should only be made after reading the strategy documentation and conducting in-depth and independent due diligence.
ASIA PACIFIC
Hong Kong: This material is disseminated by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this material have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this material shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This material is disseminated by Morgan Stanley Investment Management Company and should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This publication has not been reviewed by the Monetary Authority of Singapore. Australia: This material is provided by Morgan Stanley Investment Management (Australia) Pty Ltd ABN 22122040037, AFSL No. 314182 and its affiliates and does not constitute an offer of interests. Morgan Stanley Investment Management (Australia) Pty Limited arranges for MSIM affiliates to provide financial services to Australian wholesale clients. Interests will only be offered in circumstances under which no disclosure is required under the Corporations Act 2001 (Cth) (the “Corporations Act”). Any offer of interests will not purport to be an offer of interests in circumstances under which disclosure is required under the Corporations Act and will only be made to persons who qualify as a “wholesale client” (as defined in the Corporations Act). This material will not be lodged with the Australian Securities and Investments Commission.
Japan
For professional investors, this material is circulated or distributed for informational purposes only. For those who are not professional investors, this material is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This material is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: the Japan Securities Dealers Association, The Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.