PARTNER CONTENT
The GP-led secondary market continues to evolve and flourish, supported by ongoing demand for liquidity and a narrowing bid-ask spread between prospective buyers and sellers. The GP-led secondaries market has grown more than sevenfold in less than a decade, from $7bn in 2015 to $52bn in 2023, with the single-asset continuation vehicle market undergoing substantial growth. In this Q&A, Nash Waterman, Portfolio Manager and Head of Private Markets Secondaries at Morgan Stanley Investment Management, discusses the burgeoning opportunity set for single-asset GP-led deals.
What is the origin of GP-led secondaries investments and how has the market evolved?
Nash Waterman (NW): GP-led deals were initially designed in the early 2000s to help managers of private equity portfolios spin out of banks. Single-asset transactions are now the fastest growing segment of secondaries.1 They potentially enable GPs to continue to own high conviction assets in their existing portfolio with unrealized growth potential, while permitting optional liquidity to underlying limited partners. The adoption of the GP-led market may continue to create opportunities for GPs, portfolio companies, as well as existing and prospective LPs.
What draws investors to single-asset GP-led secondaries?
NW: We believe single-asset GP-led secondaries offer the most advantaged access to top-quality assets in the middle market. Primary deal activity has outstripped secondaries demand, growing the universe of investable assets. This allows managers like Morgan Stanley to identify and invest in what we believe to be the best assets held within already highly selective private equity portfolios. We believe a continuation thesis supporting a strong-performing asset alongside a highly motivated sponsor can present attractive risk-adjusted returns for investors. Furthermore, an allocation to a single-asset focused secondaries fund can help an allocator to efficiently capture value that they might have otherwise lost when assets are sold into continuation funds, thus enhancing overall risk-adjusted performance.
What characteristics are you looking for in an asset for these transactions?
NW: To invest resiliently, we identify businesses that will grow through benign and volatile market conditions. This approach draws us to companies that provide a solution that lowers the overall cost to customers. Such opportunities may arise from technological advances or services that better address the evolving needs of customers, often solving problems that did not exist 10-15 years ago. Businesses that focus on creating efficiency and enhancing the customer value proposition become essential for their customers and may thrive regardless of market/cycle timing.
What skills