Swiss-based Partners Group is targeting the younger end of the secondaries market with its new fund Partners Group Secondary LP, a Delaware limited partnership. The fund will acquire interests in existing private equity partnerships from sellers worldwide. It will draw upon Partners Group’s primary and secondary private equity investment experience and its relationships with both general partners and limited partners to generate attractive returns for investors. A first close at €100m is planned for October and the fund will be capped at €500m, which it hopes to reach by mid 2004.
Stephan Schaeli, head of secondaries and portfolio management, says the fund is implementing a slightly different investment strategy to most secondary funds. The fund will focus on “manager secondary” investments in partnerships typically less than 70% invested and which are generally two to five years old. These younger funds are generally still in the J-curve phase and significant write-ups in net asset value have typically not yet occurred. Schaeli believes this type of transaction creates a unique value proposition and a more attractive risk-return profile than most traditional secondaries.
He says: “We saw a trend. A lot of large buyout funds have been raised between 1998 and 2000. While previously these buyout funds might have only been attracting 30 LPs, now a limited partnership can comprise around 100 investors and there is an increased probability that some of these investors will want to get out before the ten years is up.”
A major source of deal flow will arise from Partners Group involvement in the primary market where it has invested in around 150 partnerships worldwide. This suggests that the fund will face competitive pressure from the fund-of-funds market in general, rather than the secondary investors, which tend to invest in funds that are six or seven years old. Thus far the fund-of-funds market has provided a relatively quick and clean exit route for LPs wishing to exit younger funds, although the presence of a dedicated provider n the market that does not necessarily require a previous relationship with a fund will augment this market niche.
So far the response to the fund has been positive, says Schaeli. The group is also hoping to attract some new entrants to the secondaries market who like growth opportunity. Around 65% of the fund will be invested in “manager secondary” investments in private equity partnerships, which are generally two to five years old. The remainder will focus on more mature assets, but these will still be relatively young at 5 to 7 years old rather than ten years old. A typical investment will be between €10m and €25m. It will be two thirds invested in European buyout funds and a third will be aimed at the US.
Secondary transactions have always been a main focus of Partners Group and it has invested $600m in secondaries since 1998.