private credit & niche secondaries market update
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Private Credit & Niche Secondaries Market UpdateMay 2021
Disclaimer:Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases has not been updated through the date of thedistribution of this presentation. While such sources are believed to be reliable for the purposes used herein, Dorchester does not assume any responsibility for the accuracy or completeness of suchinformation. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to theaccuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Dorchesterconsiders to be reasonable. This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for informationpurposes only.
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Rob Johnson, CFADorchester Capital Advisors
Jason Gabrielli, CFADorchester Capital Advisors
Sophie GioanniLinchpin IFM Ltd
PRIVATE CREDIT & NICHE SECONDARIESHosted by Linchpin IFM Ltd and Dorchester Capital Advisors
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D O RC H E S T E R C A P I TA L - OV E RV I E WWith over $1.1 billion of assets under management as of May 2021, Dorchester invests between $1 to $50 million1 in any single fund or asset, and up to $200 million1 in
diversified portfolios of funds or assets, among the following categories:
AN INTEGRATEDAPPROACH TO ALTERNATIVEINVESTMENTS
¹ Through Overflow Funds, Dorchester periodically invests in transactions in excess of $50 million for single assets or $200 million for diversified portfolios
S E C O N D A R I E S& G P S O L U T I O N S
Secondary LP investments and fund restructuring solutions in Hedge, Private Credit, Private Equity,
Tail-end, Co-investments, and other Alternative Investment Funds
O P P O R T U N I S T I CD I R E C T
I N V E S T M E N T SOpportunistic Direct Investments in Credit, and
Credit-like Special Situations
D I R E C TL E N D I N GBespoke financing solutions for Funds, General Partners, Limited Partners, and Corporates
P R I M A R YI N V E S T M E N T SPrimary investments in Hedge, Private Credit, and Private Equity Funds, including SMAs, Co-investments, Syndications and other Alternative Investment Funds
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• D i s t r e s s e d / S p e c i a l S i t s• S t r u c t u r e d C r e d i t• D i re c t L e n d i n g• M e z za n i n e• S p e c i a l t y F i n a n c e
Private Credit
• S i d e - p o c ke t s / S P Vs• G a te d o r s u s p e n d e d f u n d s• C o - i nv e s t m e nt s• L o n g l o c k - u p f u n d s
Hedge Funds
• D i s t r e s s e d / S p e c . S i t s• C o m p l ex s i t u a t i o n s• S m a l l e r & o f f - t h e - r u n
f u n d s• Ta i l - e n d f u n d s
Private Equity
• L i t i ga t i o n F i n a n c e• Ro ya l t i e s• Av i a t i o n & M a r i t i m e• P r i va te C o . S to c k L e n d i n g
New Alternatives
W H AT A R E P R I VAT E C R E D I T & N I C H E S ECO N DA R I E S ?
T h e s e c o n d a r y m a r ke t fo r p r i va te e q u i t y f u n d i n te re st s i s m a t u re a n d re l a t i ve l y e f f i c i e nt . O t h e r a l te r n a t i ve
i nve st m e n t c a t e g o r i e s h ave n o t d e ve l o p e d d e e p s e c o n d a r y m a r ke t s d e s p i t e d ra m a t i c g ro w t h i n a s s e t s .
P r i va t e C re d i t & N i c h e S e c o n d a r i e s i n c l u d e :
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I N V E S TO RS E XC H A N G E L I Q U I D I T Y F O R Y I E L D
I nve st o rs s e a rc h i n g fo r h i g h e r y i e l d s a re g rav i ta t i n g t o w a rd s l o n ge r d u ra t i o n , l e s s l i q u i d a l t e r n a t i ve s w i t h p o t e n t i a l l y g re a t e r r i s k l i ke
P r i va t e Eq u i t y a n d P r i va t e C re d i t , w h i c h c a n a l s o u s e l e ve ra ge t o e n h a n c e re t u r n s a n d w h o s e re s u l t s m ay n o t b e k n o w n fo r s o m e t i m e
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000Private Markets AUM ($ billions)Natural Resources
Private Debt
Infrastructure
Real Estate
Private Equity
Source: Preqin
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Organizational priorities, CIOs, board members, Investment Policy
Statements, fundamental views on the markets, return expectations, and
GP & consultant relationships may change over time, necessitating re-
evaluation of portfolio holdings, especially small and unintended assets.
Investors are increasingly turning to the secondary market as a portfolio
management tool to respond to changes.
The secondary market for private equity investors is mature but has only
recently developed for private credit and niche alternatives.
As noted on chart on the right, more and more CIOs are reaching their
expected tenure leading to future CIO staff (and subsequent portfolio)
turnover 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
5
10
15
20
25
30
35
5 10 15 20 More
% o
f To
p 1
00
CIO
s
Nu
mb
er o
f C
IOs
CIO Tenure in Years
Top 100 Asset Managers
Length of CIO Tenure
Source: AI-CIO Magazine
“ W H E N T H E FA C T S C H A N G E , I C H A N G E M Y M I N D ”-John Maynard Keynes
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Secondary Market Volume ($ billions) 2020 Transaction Volume by Asset Class Growth in GP Led Secondary ($ billions)
Source: Evercore, Greenhill
S ECO N DA RY M A R K E T T R E N D S
S e c o n d a r i e s f u n d ra i s i n g a n d t ra n s a c t i o n vo l u m e h ave s o a re d s i n c e 2 0 0 9 , b u t b u y e rs a re c o n c e n t ra t e d i n b u y o u t a n d g ro w t h e q u i t y
s t ra t e g i e s . D e s p i t e ra p i d g ro w t h i n P r i va t e C re d i t a n d N i c h e A l t e r n a t i ve s , t h e re a re fe w s e c o n d a r y b u ye rs fo c u s e d o n t h e s e c a t e g o r i e s ,
i n p a r t b e c a u s e t h e y a re s u b st a n t i a l l y d i f fe re nt G Ps a n d u n d e r l y i n g a s s e t s .
$20
$10
$22$26 $27 $26
$47
$42
$37
$54
$72
$80
$60
$2
$8$7
$9
$14
$24
$26 $26
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%Volume (left)
%of total volume
(right)
Buyout and Growth
81%
Venture5%
Infrastructure5%
Private Debt3%
Real Estate3% Other
3%
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D RY P O W D E R I S CO N C E N T R AT E D I N P R I VAT E EQ U I T Y S ECO N DA R I E S
Secondary Market Dry Powder (12/31/20, $b) Secondary Market Dry Powder – Split by Asset Class Secondary Market Fundraising – Split by Asset Class
Source: Evercore
E i g h t m e ga - f u n d s a c c o u n t fo r 5 0 % o f t h e d r y p o w d e r o f s e c o n d a r y b u ye rs , w h i c h d r i ve s t h e m a r ke t ’s fo c u s o n l a rge p o r t fo l i o a n d G P
l e d t ra n s a c t i o n s i n p r i va t e e q u i t y. M o st s e c o n d a r y f u n d s ’ c u r re n t a n d p l a n n e d d e p l o y m e n t s a re c o n c e n t ra t e d i n h i g h l y t ra n s p a r e nt
L B O a n d g ro w t h e q u i t y f u n d s ( 8 6 % o f vo l u m e ) . S m a l l e r, m o re o f f - t h e - r u n , a n d l e s s t ra n s p a re nt s t ra t e g i e s o r m a n a ge rs a re e s c h e w e d
b y l a rge r p l ay e rs .
Top 8
Buyers,
50%
Top 19
Buyers,
25%
Top 34
Buyers, 15%
10%
$113 billion
Broader PE
76%
Infrastructure
8%
Real Estate
2%
Preferred
Equity
9%
Other
5%
Broader PE
86%
Infrastructure
6%
Real Estate
4%
Preferred
Equity
3%
Other
1%
Top 19 buyers are 75% of dry
powder for secondaries
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UNIQUE UNDERWRITING CHALLENGESU n d e r w r i t i n g p r i va t e c re d i t a n d n i c h e s e c o n d a r i e s t a ke s u n c o m m o n ex p e r t i s e .
R E L AT I O N S H I P S
Effective buyers have
existing relationships with
general partners in private
credit and other strategies.
By mandate and experience,
most PE secondary funds
lack this network.
F U N DA M E N TA L S
Credit and Niche
Secondaries require
fundamental, bottom-up
analysis and the ability to
solve for complex situations.
T R A N S PA R E N C Y
Credit and Niche Secondaries
frequently lack transparency PE
secondary buyers are
accustomed to having.
Effective buyers can overcome
this through pre-existing GP
relationships and knowledge.
C O M P L E X I T Y
Niche Secondaries
sometimes involve complex
issues, such as esoteric
investment strategies,
structures, legal issues, or
counterparty considerations.
M A N DAT E
Many secondary buyers
cannot buy Credit and Niche
Secondaries due to
restrictive mandates or
Investment Policy
Statements.
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NICHE SECONDARIES AS ALTERNATIVE CREDIT
Credit & NicheSecondaries
Private EquitySecondaries
Underwriting Criteria Preservation Growth
Diversification Highly diversified Increasingly concentrated
Duration 2-4 years 5-10 years
Correlation Low Moderate
Competition Limited Competitive
T h e re a re ke y d i f fe re n c e s b e t w e e n P r i va t e Eq u i t y a n d P r i va t e C re d i t & N i c h e s e c o n d a r i e s ,
a n d t h u s w h o s h o u l d b e s h o w n w h i c h o f fe r i n g s .
Private equity secondary buyers, given their size and
need for transparency, are not inclined to purchase
outside their core focus, leaving other categories with
few natural buyers.
A S S E T S
Private Credit & Niche Secondaries often involve fund
interests that do not conform to the terms for secondary
private equity funds i.e. too short duration.
S T R U C T U R E
Secondary sales of private credit, hedge funds, and other
niche alternatives are frequently smaller, require unique
due diligence, and are shorter duration than the
required threshold for many traditional private equity
secondary buyers.
S I Z E
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A private pension sought liquidity on a $200+ million portfolio consisting of more than 25 fund interests, $25 million of which were credit strategies. Outperformance in the
seller’s broader private equity portfolio provided “cushion” to accept a discount, especially with a timely sale by quarter-end.
Distressed Debt 156%
Mezzanine 117%
Distressed Debt 212%
Distressed Debt 312%
Distressed Debt 42%
Mezzanine 21%
CASE STUDY: PROJECT S ILVER
$25m subset of $200m+ portfolio
Dorchester overcame limited transparency
through its pre-existing relationship with 4 of
the 5 credit and niche GPs in the portfolio, and
independent knowledge of major underlying
positions.
T R A N S P A R E N C Y
Dorchester is one of only two approved
buyers of the largest position, Distressed
Debt 1, thereby reducing execution risk
for the seller1.
A P P R O V E D B U Y E R
Dorchester developed a constructive view and
identified overlooked sources of value due to
knowledge of the managers, underlying
positions, and fundamental credit underwriting
expertise.
C R E D I T E X P E R T I S E
Dorchester bid jointly with traditional PE
secondary buyers, who did not have the
due diligence expertise to buy the niche
and credit assets. Dorchester’s specialist
nature resulted in better overall pricing
and execution.
H O L I S T I C S O L U T I O N
Dorchester’s Advantage
Transaction Summary
1. Private Credit and Hedge Funds do not typically want to devote time to provide necessary transparency for secondary transfers, so they limit sales to pre-approved buyers
Please see Disclaimer on the cover page of this presentation
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Dorchester is happy to work with prospective sellers on how best to position their portfolios
for a secondary market process. Dorchester provides liquidity solutions to Limited and
General Partners of Private Credit, Hedge Funds, Private Equity, and other Alternative
Investment Funds. Dorchester is willing to work with opaque, illiquid, overlooked,
complicated, or time constrained situations.
Whether buying illiquid LP Interests or restructuring an entire fund, Dorchester is a trusted
partner that can craft solutions to meet your specific needs and overcome constraints to
achieve your desired outcomes.
Please contact Sophie Gioanni, Rob Johnson, or Jason Gabrielli for additional information.
Addit ional Information
Robert Johnson
t: +1 (310) 402-5081
m: +1 (773) 358-0861
Jason Gabrielli
t: +1 (310) 402-5084
m: +1 (213) 422-7524
Dorchester Capital Advisors LLC | 11111 Santa Monica Blvd, Suite 1250, Los Angeles CA | www.dorchestercapital.com
Sophie Gioanni
t: +44 203 637 6341
m: +44 7923 246 376