Lure of ‘Free Money' in Secondaries Nears a Mania

Mint

a day ago

(Bloomberg) -- Demand for secondary funds focused on private markets is soaring, in part because some investors are seizing on an accounting quirk that allows them to buy assets at a discount and then revalue them at par.
It's 'creating this sense that people are just picking up free money, and almost a mania,' Blue Owl Capital Co-Chief Executive Officer Marc Lipschultz said on a call with analysts recently. He said his firm avoids the practice, adding there is still a 'great business to be had being a really thoughtful buyer of secondary interest when you have more sellers today than you've ever had in the past.'
The secondary market allows investors to buy or sell stakes in private-asset funds, often at a discount. It's become an increasingly popular solution to the problem that many managers faced at the end of the easy-money era, when higher interest rates made some valuations more difficult to justify — and left them unable to exit investments.
Credit is expected to be the fastest-growing part of secondaries for years to come, according to Jefferies Financial Group Inc., which forecasts the number of transactions in the space to grow to more than $17 billion this year from $10 billion last year. The marketplace for fund stakes is drawing more sellers than ever before, pushing up prices, which is tempting more investors to look at disposals.
Investors in private credit funds looking for liquidity are now able to shift their positions into the secondary market, clearing a bottleneck in the financing chain. The deadlock started when dealmaking stalled, forcing private company owners to hold on to assets for longer. That meant direct lenders had to extend loans for longer too and wait to cash out, crimping returns for some.
One benefit for some buyers is the accounting treatment which allows them to mark up the acquisitions, bolstering the value of the assets.
'It's true that secondary transactions are often completed at a discount to NAV, and yes, that can create an initial unrealized gain for the buyer,' private capital investor Hamilton Lane wrote on its website last month. 'But this isn't artificial. It represents real value and can enhance returns for the fund.'
More broadly, the wider secondaries trend has proven fruitful recently. The strategy was the best performing for Blackstone Inc. in the second quarter, the alternative asset manager said in a presentation last month. The firm is considering a standalone pool of capital to buy second-hand private credit funds through its Strategic Partners unit, Bloomberg News reported last month.
London-based Coller Capital Ltd. closed a deal for a $3 billion continuation fund with direct lender TPG Twin Brook Capital Partners this past week that will transfer a portfolio of loans from the US firm's previous vintages into a new fund. It's the largest such vehicle in private credit secondaries to date.
Other signs of appetite for the strategy include Pantheon, a manager of more than $70 billion, raising three times its original target of $750 million for its third credit secondaries fund.
Ares Management Corp., meanwhile, has so far raised more than $3.5 billion for its debut credit secondaries fund and related vehicles, Chief Executive Officer Michael Arougheti said on an earnings call last month. The secondaries group 'remains one of our strongest growth vectors for the foreseeable future,' he said.
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