Eric Albertson is senior investment director in charge of secondaries at Aberdeen Standard Investments. He spoke with Buyouts about his firm’s approach to finding value in the secondary PE marketplace.
Aberdeen tends to focus on the smaller end of the secondary market. What kinds of opportunities are you seeing?
We will use secondaries sporadically throughout our various portfolios for a variety of reasons. Secondaries are a way of mitigating some of the J-curve, getting invested earlier and also just diversifying the vintage year. Secondaries can let you magically go back in time and buy assets that were bought three or four years earlier, in a fund that didn’t exist when those portfolios were being created.
How does the secondary market complement Aberdeen’s other PE investments?
We have some secondaries-only mandates that are looking for higher IRR, quicker deployment, a quicker realization and distribution profile and a shorter hold. For some of our underlying investors who frankly struggle with the idea of a 10- or 12-year lockup in a more traditional pool, they like the idea of getting the majority of their economics back over four, five or six years.
A lot of the earlier secondaries tend to still have a lot of multiple, so they’re almost a poor man’s primary [commitment] in some ways. And we will do some of the tail-end stuff, especially through GP-led secondaries, where there may be two or three assets left in a fund. Technically those are really old assets, but you’re giving them five years of new life to grow.
If the assets in a tail-end fund are no longer appealing to the original LPs, what drives demand on the secondary market?
It’s not unusual to buy portfolios that are that old that are discounted at 20, 30 percent of [net asset value].
If there’s a $10 million portfolio and you’re only paying $8 million, day one when you take that back to your investors, it looks like you’ve done something Herculean — you’ve picked up a dollar for 80 cents and that’s really cool. The challenge with that, however, is that the cats and dogs that are left in those funds generally don’t grow as much as you’d like, so a lot of your gain in those types of trades tends to be predicated on the discount.
We have always taken the position of trying to be a little more niche and nimble and trying to go up the age curve.
Is a specific fund age a sweet spot for Aberdeen?
If we can find portfolios that are years five, six or seven, where the majority of the portfolio is already in the ground, that’s a more interesting place to play because there’s just more multiple opportunity there, in terms of compounding your money.
When we’re buying portfolios that are five, six, seven years old, we’re still really fundamentally looking for value NAV appreciation from good assets.
Even if we’re not getting a 25 percent discount, even if we really like a portfolio and have to pay close to par or at par, our underwriting is much more about the underlying value appreciation and growth of those portfolio companies. The math is very different, and the analysis is different.
What are some other areas where an opportunistic buyer can get a good deal?
We will on occasion buy LP interests in fund of funds. If you have an investor who started out in private equity doing fund of funds originally, and has made an executive decision to change and go more direct into the underlying funds themselves, [they may be selling] portfolios that by definition will have exposures to the Blackstones and the Bains and the TPGs. So we’re not so dogmatic that we’re [looking only for small and mid-market opportunities]. Our preference is to do those niche, buyout, five- to seven-year-type funds, but there are certainly other types of areas that we will look at.