Nigel Dawn, who heads up Evercore’s private capital advisory business, and Andrew Hawkins, head of private equity solutions at ICG, may be two of the busiest people in secondaries these days. Buyouts snagged nearly an hour with Dawn and Hawkins to get a sense of why so many GPs are embracing secondaries as a way to hold their best assets, and the dearth of talent necessary to handle the crush of deals in this wildly growing part of the market.
The supply of secondaries opportunities seems to be outpacing firms’ ability to transact. How is that impacting this growing market?
Andrew Hawkins: There are just not enough people around to do these transactions. I know this because my team gets constantly bombarded by headhunters saying, “Why don’t you come and work for X,Y, Z firm that’s starting up a GP-led specialist investment business?” Fortunately, they’ve got a very good answer, which is they’re enjoying life where they are.
There is absolutely a dearth of talent. If you are looking to establish a presence in the field – and a number of very large multi-strategy asset managers have been in the market starting things going … I would say that the biggest constraint is probably finding the people who have the experience to be able to do those kinds of transactions.
How is the skill set for GP-led transactions unique from other strategies?
Nigel Dawn: The right skill set for this is really a hybrid of a direct investor and a limited partner. Some of the secondary groups would say they’re fundamentally a limited partner and they will secure a significant amount of their comfort from their alignment with the general partner. That’s how they’ll evaluate things, which is not an unreasonable position to take, really understanding the manager, performance and what they plan to do with the asset.
The difference is, if you’re writing a $10 million check into a company versus a $500 million check, the depth of analysis you’ll want to do, the understanding of the sector, the company, the drivers and all that sort of thing, it’s probably, in terms of the scale, more moving towards a classic direct investor. That is a very large check and its concentration in your fund as an investor, so I think there’s a retooling going on within the secondary investing community, recognizing direct investing skill, particularly the single asset deals when you’re going to be making significant equity checks, are pretty important.
AH: There’s a nuance, and that is that some quarters of private equity have, let’s say, individuals with strong personalities, which is great, but there is a risk if you just take somebody in the direct investing side at a big buyout shop and put them into one of these transactions. You’re going to have some friction because a few big egos in a room can be very difficult.
What we’ve done, having learned the hard way, is we’ve actually brought people into our business at relatively junior levels … we want them to have these extraordinary relationships with the people we partner with and that requires, frankly, some humility and that’s a quality that is often somewhat lacking in the private equity world but it’s a very important quality. We’re not trying to outsmart or outfox the GP partner, we love to be helpful, constructive partners. It’s a non-trivial task to convert somebody from being a direct PE investor to being a great GP-led partner. There’s some wood to chop there.
What is driving the desire among GPs to use secondaries technology to hold certain assets longer?
ND: The key change that we’ve seen … is viewing the secondary market and the acquisition fund or continuation fund market, as a real M&A alternative to an exit to another sponsor, strategic IPO or a SPAC. So seeing this as a way for the GP to achieve their strategic objectives with the portfolio company as well as creating a level of optionality for the limited partners that they’ve never enjoyed before. A lot of GPs have really understood the actual value of this technology.
If you ask the managing partner or any partner frankly of a private equity fund if they have any regrets, what are they? Often they will tell you that they sold their best companies too early.
When Andrew and I started off in this business, usually it was a GP calling up their LPs and saying, ‘I’m thinking about a GP-sponsored transaction’. [That] was not a good news story, whereas these days it’s fair to say it’s a good news story because usually, and particularly with a focus on single assets, it’s one of the best companies which they’ve done well already with terrific growth prospects. From my perspective, that’s one of the changes this year that really is front and center.
We’re taking the best ideas from the best GPs, it’s not like Led Zeppelin’s greatest hits, it’s the greatest hits of rock.
AH: This is a GP deciding they’ve got one gorgeous prize asset they want to keep and they put it in a continuation vehicle so that they can hold it for another five years rather than selling it and watching [another sponsor] make 3x their money. What you’re really seeing here is GPs actively taking their best assets and putting them into these vehicles, so you could say for that GP that if they’re demonstrating that they’re really biased by putting new money of their own or rolling all their carry, then it’s a great signal that these are the assets you want to own. As we think about the single asset marketplace, we think our job here is to curate what I will call the greatest hits of private equity. We’re taking the best ideas from the best GPs, it’s not like Led Zeppelin’s greatest hits, it’s the greatest hits of rock. Because we’re taking each of those GPs and picking the ones that have the highest potential return.
In my career I’ve never seen such a concentrated way of achieving the best performance in private equity with the lowest risk, and I think it’s here to stay and we’ll see … more of these things happening.
ND: If you ask the managing partner or any partner frankly of a private equity fund if they have any regrets, what are they? Often they will tell you that they sold their best companies too early. It’s not every company by any means … it’s their best ideas. If they could have held on to it, they would have done, and so what I often hear in speaking to GPs is that if this technology would have been available we would have used it.
How do management teams react to this sort of transaction as opposed to a traditional M&A sale?
ND: This creates essentially all the benefits of a full exit but without many of the downsides associated with the disruption of a management team which can often take them out of the market effectively for a year or so depending on how invasive the process is. You cut out a lot of the friction costs, a lot of the disruption. But I think for a lot of GPs they think that we’re not going to force our LPs then just to take liquidity if they don’t want it, you’re giving an option to your own limited partners to say, “If you want to take cash right now you can but if you don’t, [that’s ok].” All limited partners are not created equally; some have a very long-term perspective so they may say, “I’m more than happy to roll over, continue investing with you,” particularly when they see the GP doubling down themselves on the asset because they love it.
We probably wouldn’t have been able to do all this if we hadn’t all been working from home, so that you don’t have a lot of wasted time traveling between meetings and on planes and so forth, ironically. I can tell you, there’s no hint of a slowdown whatever.
AH: Management teams tend to love this, and this is probably a good signal … of a great asset. Typically you’ll see management teams wanting to increase their own position because in many cases, the scale these businesses are built to and perhaps the duration that the firm has owned the asset, means the capital for M&A is not available or is limited. A lot of these transactions … have follow-on capital available. There’s a sense of dynamism, enthusiasm, almost glee at the ability to be able to continue to own this in partnership with a manager that they know and trust, and the opportunity to make something really fantastic.
What kind of activity levels are you seeing this year? What’s your expectation?
AH: Our team has never been more active and it’s been unremitting. These are intense pieces of work, real heavy lifting, lots of diligence. We probably wouldn’t have been able to do all this if we hadn’t all been working from home, so that you don’t have a lot of wasted time traveling between meetings and on planes and so forth, ironically. I can tell you, there’s no hint of a slowdown whatever.
ND: It’s never been busier and it’s sort of cranking up right now. My sense is that we’re definitely heading toward a $100 billion secondary market this year, up from $60 billion last year, [and the] prior year 2019 was $80 billion. That’s fairly significant growth year on year, certainly the majority of that will be driven by general partners, not limited partners. It’s a real change in how this market operates and it’s likely to be, I think, a similar trajectory going forward.
AH: In terms of the biggest constraint on the growth of this market, the continuation vehicle market – making the overriding assumption that this is a very good thing for participants – the biggest constraints is not LP willingness to accept these deals, not GP enthusiasm, not whether these are the greatest hits of private equity. From my lens looking at the deals we do, it’s clear to me that there is nowhere near enough capital in the secondaries ecosystem to deal with the flow of business already in the market and what’s coming.
Lightly edited by Chris Witkowsky for clarity