Five Questions with Tom Kerr of Hamilton Lane on the rise of GP-led secondaries

Tom Kerr is head of secondaries at Hamilton Lane. He spoke with Buyouts about the mainstreaming of GP-led transactions and the impact that such liquidity options have on the maturing secondary market.

You’ve noted the rise in secondary transactions – from less than $1 billion in 1998, to $20 billion in 2008, to an estimated $60 billion to $70 billion in 2018. What is driving the increased interested in secondary transactions?

A closed-end fund prescribes a certain finite life to a fund and characteristics of that fund, in which the beginning part is your investing period and the ending part is your harvesting period. Well, let’s pretend that you’re getting towards the end of a fund’s life, and not all the assets are following that same path.

Historically, it was very challenging to resolve those competing interests towards the end of that time period if things didn’t line up for whatever reason – this company needs more capital, but it’s outside the investment period, or this group of investors wants to liquidate the fund because it’s at the end of the 10 or 12 years, and this other group of investors says “no, no, no, there’s still value to maximize there.” How do you deal with all that?

The secondary market has stepped in to create optionality in these situations and provide alternatives to what has historically been a more challenging situation.

Looking back to last year, what trend has stood out to you about the secondary market?  

I think 2018 has solidified the trend around GP-led transactions. It’s not new, but it is a newer phenomenon, and it’s become much more mainstream as the secondary market has grown. These are more whole fund solutions, where the GP of the fund may provide liquidity options to LPs in an organized fashion. If you want to have liquidity, you can have it, and if not, you can stay along and continue on, but this is a liquidity option.

If you look at overall volumes, I think you’re going to see 25 to 30 percent of the market, if not more, will be in these transactions. Last year that was probably more like 20 percent. They’re increasing as a percentage, the volumes are increasing overall, so it’s a much bigger part of the market, and if anything, the mainstream nature of those trades and those transactions has been the story of 2018.

How have GP-led deals evolved over recent years?

Historically, these types of transactions happened around situations that were broken – there’s something wrong with the franchise, there’s something wrong with the assets and therefore a solution is necessary.

It’s now much more opportunistic, and it’s happening with much more high-quality brand name groups that are looking at it opportunistically, and looking at it to provide that flexibility and alternative source of liquidity. That has been a pretty recognizable shift.

What does the mainstreaming of GP-led secondary transactions, and secondary transactions more generally, mean for the industry as a whole?

The secondary market, at its core, is liquidity for an otherwise illiquid asset. This market is a derivative of that growing PE market, and with more people coming into the asset class, there is more demand on the secondary market.

Conceptually, what does it mean? This is a way to say let’s the change the paradigm and suggest that there are alternatives to [a closed-end fund with clearly delineated investing and exit periods]. It’s not going to work for every fund and not every fund is going to need that, but there are going to be circumstances where that is necessary, and having that optionality is a positive for the asset class. It creates more flexibility for LPs, GPs, for the ecosytem, and allows for more assets in private markets.

How does a robust secondaries market increase overall demand for private equity?

One of the big challenges in 2009 around private markets was, if you needed liquidity, it was very hard to get that. You had to take a huge haircut to achieve any liquidity from your illiquid portfolio, and that changed the mindset of institutional investors around illiquids and around what that exposure meant for them.

This market, over the last 10 years, has emerged to answer that question, and has dampened some of the angst around the illiquidity of the asset class. It may be an illiquid asset, but the liquidity market for it is full and vibrant and accessible, and that alleviates some of those concerns.

Action Item: Check out Hamilton Lane’s 2018-2019 GP Dashboard here https://bit.ly/2DjjlHb