PER guide to a career in secondaries
Secondaries therefore represent one of the fastest growing and most dynamic areas of private markets, yet it is often a space that isn’t fully understood. We have therefore put together this guide to give some insights into what a career in secondaries would look like, and why it is something you should consider.
What are secondaries?
Private equity secondaries refers to the acquisition of existing investors, or Limited Partner (LP), commitments in one or more private equity funds managed by General Partners (GPs). The buyer of the commitment will replace the selling LP in the fund and take over any remaining commitments.
The secondaries market emerged to provide liquidity to LPs who had invested in private equity funds and had their capital tied up for the life of the fund, which could be ten years or more. In order to crystallize their interest in that fund early, the LP could sell their position on the secondary market. The reasons an LP might want to sell their stake vary - It could be strategic, to adjust their allocation to that particular asset class, or it could be due to a need for liquidity.
The secondaries market emerged to provide liquidity to LPs who had invested in private equity funds and had their capital tied up for the life of the fund, which could be ten years or more. In order to crystallize their interest in that fund early, the LP could sell their position on the secondary market. The reasons an LP might want to sell their stake vary - It could be strategic, to adjust their allocation to that particular asset class, or it could be due to a need for liquidity.
Broadly speaking, secondaries can be divided into LP and GP-led transactions. LP-led secondaries arise when an institutional investor eg. a pension fund/sovereign wealth fund etc, sells a portfolio of private equity fund commitments. The portfolio can be highly varied in terms of the size of the underlying funds, their investment strategies, their geographical/sector coverages, and their vintages.
GP-led secondaries are instead initiated by the GP, looking to restructure the ownership of one of more assets within their funds, whilst also providing liquidity to existing LPs. There are several ways these deals can be structured, but the most common scenario would be to set up a ‘continuation vehicle’, that would acquire one or more companies from the GPs existing fund. This would still be managed by the same GP to allow them to continue to develop and grow their assets, but is backed by new investors, giving the original LP the option to ‘cash out’, should they wish.
GP-led secondaries are instead initiated by the GP, looking to restructure the ownership of one of more assets within their funds, whilst also providing liquidity to existing LPs. There are several ways these deals can be structured, but the most common scenario would be to set up a ‘continuation vehicle’, that would acquire one or more companies from the GPs existing fund. This would still be managed by the same GP to allow them to continue to develop and grow their assets, but is backed by new investors, giving the original LP the option to ‘cash out’, should they wish.
What to expect from a role in secondaries?
Everyone who makes it into secondaries is intelligent, thorough and proactive, and this makes for a stimulating environment. The structures are flat, and partners and principals actively seek your thoughts. Everyone has a slightly different perspective on the same issue and each view is valid and adds depth to the decision making. It’s encouraged and expected that you express an opinion; you’ll need to think about what’s going on and add value to the analysis. Your opinions will be sought and will count.
Most associates joining secondaries firms come from large investment banks or the Big Four professional services firms, so their first impression is the difference in the size of the organisation and the variety of people. In one London team, for example, everyone has a different mother tongue. Secondaries teams are usually described as approachable and genuinely friendly places to work.
Given the breadth of deals you will work on, you will develop an extensive, versatile investment skillset. One week you may be working on a large portfolio deal, whereas the next you may work on a single asset Continuation vehicle, both of which will need to be approached in very different ways. In the latter, you need to be able to build a full LBO model, often from scratch, and talk extensively to management about detailed cash flow assumptions. In the former, you will need to have an informed position about the overall portfolio and understand the performance of each underlying investment.
On-the-job training
If you’re hired into secondaries, you’ll probably have all the modelling skills required, so much of the ongoing training is ‘on the job’. Specifically, you will learn the techniques of secondary valuations, how to carry out due diligence and how to represent your firm in front of vendors and advisors. The partners will coach you on how to approach investments and provide insight into the different elements of the transaction and the variety of structuring techniques.
If it’s a large team, you may be part of a training program with a number of other associates. One global team offers a three-week training course in New York where the majority of the partners participate. You’ll be taught using investment case studies and you’ll study the investment opportunity and the portfolio positions, value the investment, assess the risks and opportunities, structure the investment, and prepare an investment proposal.
If it’s a large team, you may be part of a training program with a number of other associates. One global team offers a three-week training course in New York where the majority of the partners participate. You’ll be taught using investment case studies and you’ll study the investment opportunity and the portfolio positions, value the investment, assess the risks and opportunities, structure the investment, and prepare an investment proposal.
The role itself
Deal evaluation and transaction work transaction
Portfolio work
Origination
Knowledge and work experience required
Secondaries investors tend to favour people who have mathematics, science or finance degrees with excellent academic results. They look for the best students with good honours degrees. Work experience could be from a wide variety of corporate finance disciplines including M&A, leveraged finance or private equity, as well as valuations and modelling teams in professional services firms.
The main skills and experience you will need include:
- Financial analysis and valuation modelling experience
- Experience in analysing companies and industries
- A good macro-economic perspective
- Some exposure to investment structuring and legal documentation
- Transaction and negotiation exposure
- Good communication skills, written and verbal
- IT literacy, in particular, familiarity with Microsoft applications such as Excel, Word and PowerPoint
- Ability to work to tight deadlines and under pressure with minimum supervision
Skills needed to develop within the role
In addition, culture is critical so you must be seen to ‘fit in’, in particular:
- Ability to work well in a team
- Personable
- High level of professionalism, confidentiality, discretion and judgement
- Strong problem-solving, influencing and relationship-building skills
- Some secondaries teams say they only hire you if you have partner potential, which includes networking and relationship skills so that you can ultimately source investments.
The path to partner is not as structured as in a bank. Strong performers will be promoted earlier, so progression will differ among your peers. If you want to progress quickly, these are the main skill sets you need to demonstrate.
Transaction Experience
Commercial Judgement
Origination
What to expect from the interview process
The interview process can be lengthy – often involving psychometric, numeracy and verbal reasoning tests in addition to the case studies and interviews. You may be asked brain teasers during the interviews and investment questions such as, “How would you approach this investment?” It will show up during the challenging interview process if your interest in secondaries and your motivation to join that firm is not clear.
You’ll meet most of the senior team as well as analysts and associates. They’ll go over your modelling experience, your numeracy and previous exposure to private equity. You’ll have to demonstrate that you understand private equity and have researched the secondaries market in particular. The depth of your understanding of secondaries and your level of interest in the sector will be a major differentiator during the process.
During interviews you’ll need to establish and develop your own view – you don’t have to be aggressive but you do need to back up each assumption you make. You need to be rational and consistent and able to justify your views in extended discussions with associates and partners.
You’ll meet most of the senior team as well as analysts and associates. They’ll go over your modelling experience, your numeracy and previous exposure to private equity. You’ll have to demonstrate that you understand private equity and have researched the secondaries market in particular. The depth of your understanding of secondaries and your level of interest in the sector will be a major differentiator during the process.
During interviews you’ll need to establish and develop your own view – you don’t have to be aggressive but you do need to back up each assumption you make. You need to be rational and consistent and able to justify your views in extended discussions with associates and partners.
- Be thoughtful, clear and confident in your answers
- Take a position and present it decisively, backed up by analysis
- Answer the question clearly and succinctly
- Explore it from different angles
- Explain how you got to the answer
Bear in mind that, culturally, bankers are often taught to listen and are not so used to speaking up, so this can come across as being on the fence. So have a view, and make sure you stay on the right side of the line between confidence and arrogance.
Conclusion
This is an excellent time to be in secondaries. The market is well established and operates globally but is still growing quickly. It is also constantly evolving, as secondaries investors seek new and innovative ways to deploy capital and identify opportunities to generate returns. Secondaries offers something different to the large buyout funds: a much broader outlook on global investments of every vintage, industry, geography and of a vast number of companies at different stages in their lifecycle. As a secondaries investor, you’ll get to see a range of investments from numerous funds within different markets, sizes and sectors. In the role, you’ll evaluate large amounts of information within tight time constraints and have to make commercial sense of the assumptions related to the underlying companies.
Secondaries is a long-term investment with long-term rewards in the form of carried interest. When you join a team, you’ll be compensated with a base salary and bonus and may participate in the carried interest scheme. You’ll need to stay for the longer term to enjoy these rewards, so research the strategy, performance, track record and viability of the company you wish to join and explore its team culture and dynamics. Get this right and you’ll have a mentally stimulating and financially rewarding long-term role.
Secondaries is a long-term investment with long-term rewards in the form of carried interest. When you join a team, you’ll be compensated with a base salary and bonus and may participate in the carried interest scheme. You’ll need to stay for the longer term to enjoy these rewards, so research the strategy, performance, track record and viability of the company you wish to join and explore its team culture and dynamics. Get this right and you’ll have a mentally stimulating and financially rewarding long-term role.
Will Rowntree
Will focuses on investment roles across the European LP space, focussing on junior roles in secondaries, fund of funds and co-investment strategies.
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