London-based capital market advisory boutique Agem Capital Group will soon launch their long-awaited mobile app platform to provide a daringly simple solution to communication inefficiencies and information asymmetries for institutional investors on the buyside and sellside of deal origination in the private equity secondaries space. Agem’s new app is an SaaS-based deal sourcing and direct collaboration platform that works intelligently in real time as a digital compass for the secondaries strategy of institutional limited partners (LPs). Registration is limited to regulated institutional investor and fund manager professionals exclusively, the app guarantees total anonymity and privacy protection for its users. The product was developed for the smaller-end of the private equity secondaries market as a digital enabler tool for investment professionals at family offices mainly, but it could mean surprising advantages for any major institutional market participant as well. With one significant exception: Agem Group made it clear the app will not be available to broker-dealers in any way, blacklisting all major market maker secondaries advisory firms as well as any smaller middle-men. Agem’s management is adamant that it should be an individual decision of users of the app whether or not they want to work with broker-dealers or external advisors in any way in terms of secondaries processes of their alternative investment strategies, and that the secondaries market should be directly and transparently accessible to all LPs. Well, it’s the ideal fair play, isn’t it?
According to an August 12 press release by leading private capital markets data provider Preqin, secondaries funds that closed in the first half of 2020 already raised $44 billion, far surpassing previous years’ totals and even full-year records. According to an October 27 article of Secondaries Investor,
a leading online media provider of the industry, secondaries fundraising smashes all records this year, with $59.7 billion raised by funds that held final closes during the first three quarters of 2020, exceeding all full-year records to date, and with the possibility that total fundraising for dedicated secondaries vehicles could in fact increase by a further $20 billion at least, before the year-end. Furthermore, as Preqin pointed out, total dry powder on the buyside of the secondaries arena (including funds raised previously but not yet deployed in the strategy) was not less than $125 billion already at the end of June, which is another record high. In fact, during the toughest months of the COVID-19 crisis, such a vigorous fundraising activity for the secondaries strategy is in significant contrast to decreased fundraising in other private capital sectors globally. What’s happening here?
At the peak of the first wave of the coronavirus outbreak in April, Swiss investment manager Unigestion published a study with the title ”Private Equity Secondaries: The Opportunity of the Decade?”, highlighting quasi systemic risks that started to build up even before COVID-19 hit and that have been materialising quicker exactly due to its global impact during the course of this year. Pitfalls of widely prevalent excessive use of leverage across all levels of the secondaries strategy, aggressive over-commitments based on strong historic distributions and growing valuations, agressive use of deferred payment structures, for example. A September 22 writing that appeared on another leading capital market media platform, the online portal of Institutional Investor, stated this: ”Investors are betting big that secondaries funds can capitalize on the market dislocations triggered by the pandemic”. Cameron Joyce, vice president of research insights at Preqin said: “Secondaries investors are anticipating that financial market dislocations triggered by Covid-19 will put pressure on [limited partner] liquidity…This should increase the supply of assets available at discounts to fair value.” Referencing Joyce, the research editor of Institutional Investor pointed at major LPs, such as university endowments and corporate pensions, as likely sellers looking to offload private equity stakes as they encounter liquidity challenges. Other secondaries experts disagree with this view and argue that most major LPs have no liquidity concerns at all at the moment since they have more diversified portfolios, so the higher proportion of forced sales will come from family offices and other smaller limited partners. The view that it is the smaller end of the private equity secondaries market, being less competitive with LPs committed to sub-$500-million funds, that indeed presents excellent opportunities in the current market turmoil caused by COVID-19, is supported by several sources, including the Unigestion study or another thought-provoking article from Secondaries Investor, titled ”Will small buyers be the big winners in today’s market?”
The megatrends remain certain. The potential need to mitigate again the denominator effect by divestments of interests in private equity and other alternative holdings to rebalance portfolios as it happened during the 2008 Great Financial Crisis – when value decreases in listed securities and other mainstream asset classes left institutions’ portfolios overweight to private
capital – is another important reason why COVID-related uncertainties can create more favorable pricing conditions and increase deal flow for secondaries buyers. The currently historic abundance of cash stores sitting on the buyside is obviously waiting to be deployed, while global uncertainties caused by the pandemic must be priced in somehow on the secondaries sellside as discounts to net asset value (NAV). And how about one inspiring flash from the past, or two? Let’s not forget, the median net IRR performance of secondaries funds raised during the 2008-2009 financial crisis and the European debt crisis have since outperformed private equity funds in general. The mentioned Institutional Investor article for example quotes sources at Preqin: “Secondaries funds launched at times of financial market stress exhibit a clear tendency to outperform.” Christopher Beales, Private Equity Spokesperson at Preqin said in their August press release: “Secondaries funds not only managed to stand out as a success story during the GFC – they have repeatedly posted some of the highest performance figures of any private capital strategy. It’s no wonder, then, that they remain sought-after among investors. So far, we have not seen a fire sale of assets or fund stakes, but there will doubtless be increased opportunities for fund managers.”
Talking about megatrends and big toes. A critical chunk of the above mentioned huge amount of money that sits on the secondaries buyside right now, will again – as always – land on the bank accounts of just a handful of market leader, major broker-dealer firms that connect buyers with the sellside. Or will it indeed be so in the ’new normal’?
Innovative technologies, such as the new cross-platform mobile app from Agem Capital Group, may enable LPs and GPs to cut costs and waiting periods in secondaries processes by providing direct access to key market research and intelligence tools that generate real time deal data on a user-friendly and hassle-free communication and collaboration platform at the deal flow origination level. This could be especially beneficial in the smaller and more fragmented end of the private equity secondaries market, where deals are less intermediated, less competitive, achievable discounts may be bigger and building new LP/GP-relationships are more important than in the billion-dollar segment of large and established funds traditionally advised by a handful of major market makers.
In addition, Agem’s product takes a step beyond its core functions. The app focuses on the professional needs of its individual users as employees and as members of investment teams as well. It can assist team work within an institution and simultaneously provide completely anonymous job search functions for individual users, and even job listing capabilities for the companies they work for. These functionalities could make Agem’s new app popular on the team level and even on the personal level for institutional investment professionals across the private equity secondaries markets. Regardless of which end of the market the employer of the user operates in, large or small, or whether the core functionalities of the app add value to and save dollars for just a single family office or a smaller secondaries fund, or if it makes sense to be used by a great number of investment employees at even a major pension fund too.
In a time marked by COVID, recurring lockdown regulations restrict office use and personal meetings for investment teams and individuals alike on both the sellside and the buyside, many private equity secondaries professionals must work from home just like anybody else. Today there is a clear need for technology solutions that not just align with the requirements of remote working but are able to fast-track human interaction and increase productivity of remotely working employees. Such tech solutions may no longer be purely optional but a must-have to survive and thrive in the new normal.
Time will tell how far the new deal sourcing mobile app of Agem Capital can reach in the private equity secondaries markets. Although larger funds, major market makers and advisory firms may still be in a position to afford the opportunity costs of finding and doing deals the old expensive way, and they may not need external technology assistance to mitigate the impact of pandemics or help ensure business continuity just yet, it may become increasingly challenging to keep up traditional market roles in the post-COVID era. The imminent launch of such an innovative deal sourcing and direct collaboration app for private equity secondaries by a small City boutique on both Android and iOS smartphones is a good example how COVID-19 inevitably and irreversibly accelerates technological development in the capital market sector as well and as simply as it happened with food delivery or anything else. Even if it doesn’t make those with the big toes too happy.