Manulife Secondaries raises only $235mm...
Manulife Strategic Secondaries recently closed their debut GP-led fund at $610mm. Looking at past decks they have shown us, in Sept. 22 they were targetting $750mm and in Sept. 23 they reduced the target to $500mm. What is most interesting is that the parent company invested $375mm on a fee-free basis, so they ended up only raising $235mm of fee paying third party capital. 12.5% carry on $235mm ain't much.
The craziest part of it all is that the parent company allowed them to start investing in 2019 so they had been seeding their first fund for 5 years so by the time they filed their Form D to start raising external capital they already had 25+ portfolio companies and still the feedback from the market was negative.
So, in short, you invest for 3 years before going to the broader market to raise, you raise externally for an additional 2 years, you reduce your target, and you only bring in $235mm despite having Manulife's full brand and distribution network AND having a heavily seeded portfolio to market to LPs... Pretty awful outcome, but not surprising since these guys are just a syndicate player and have no real investing experience. Our I.C. called this strategy "spray and play co-investing".
Ouch. I knew it was bad but that’s worse.
It’ll be interesting to see how the other GP-led only funds do (LG, Blue Owl, Astorg). You would think the strategies that are attached to a direct buy-out shop that has an edge in certain industries would do well but TPG has been a slog too.
At the end of the day I really think LPs come to secondaries for the bread and butter LP portfolios and GP-leds are just a nice to have.
On the LP side, I've always seen GP-leds, especially the single/handful of assets vehicles as watered-down co-investment funds...They look great compared to secondary funds who are purely LP portfolios or mix of LP/GP but they look meh when compared to a co-investment fund. Rather have my managers be able to invest in what makes the most since in a given market (LP led, GP led, pref, etc.) than being constrained to a single strategy. Also, it's fairly well known that certain buyout sponsors are becoming notorious for throwing out GP-led deals that are garbage as a kick the can exercise or a way to offload assets that will lose money but are still young. There's going to be a lot of awful GP-led deals in the coming years from funds who invested in 2020-2022 and are needing to wrap up their funds.
Yeah I completely agree on the flexible mandate take.
On crap GP-leds I think the market absorbed a lot of that in 2020 and 2021 but 2022 and onward I actually think will be very solid years for secondaries more broadly. Market really leaned into the LP-led side during 2022 and crap GP-leds were very challenging to get done (and still are). But to your point, the investors that can’t flex into the more attractive side of the market were probably stuck deploying into those lower quality GP-leds. We’ll know in 5 years time.
Also curious, pretty sure I’ve seen your other comments on the LP perspective for secondaries, any names that stand out as good ones in the space?
Agreed. Pls name drop some bad GP-led deals. I know Manulife did one with an Italian ice cream company, like who wants to own that? 😂
I think this is all pretty spot-on. There will always be GP-led deal flow which is justified, however I question what the need is for the small and mid cap GP led only players. They can’t set terms, they can’t get better leverage, they can’t do better diligence and they just plain aren’t better in any clear way from their larger counterparts. They are plain hamstrung versus these same counterparts in that they lack the human capital, lender relationships and data infrastructure to participate in LP-led deals, which constitute the larger (and more proven) side of the market. Conditions change quickly enough in the secondary market that the notion of buying GP-leds alone in all climates seems to be a contrived investment thesis.
Good find - I saw they had a final close, but didn't know they raised so little from 3rd parties.
Agreed on the LPs not really wanting GP-led only, its not very hard to be a syndicate player. Its much harder to find attractive LP deals.
On LP-led I think there are three camps where you will do well:
1. Be one of the 4 largest groups, you'll get a first call and can solve an entire deal.
2. Do really small deals (like 1mm).
3. Buy stuff that no one wants the headache of owning, like a portfolio of 40 tail end funds where the positions are like 30k up to 2mm - just these clean up exercises are a nightmare to transfer and then you have the admin costs so the pricing needs to be bottom bucket.
Groups that kind of play in the middle, like doing 50-100mm LP deals struggle - no real edge and just bid in auctions against 30 other groups.
Some good comments here.
I think this is unfortunately going to be the reality for many exclusively GP-led focused players in the near future.
A few years back everyone on the buy side and sell side lost their shit and went bananas investing in the nascent GP hype machine. I think many were just chasing returns they saw captured by earlier movers who were in truth augmenting solid LP franchises with higher-octane GP opportunities. This is on both the buy and sell side. On balance, I still don’t think many of these outfits which had splashy announcements have really done much worth mentioning, nor are they clear in how they are differentiated from the growing list of alternatives.
Nowadays a bunch of outfits on the buy and sell side exist which originally positioned themselves as GP-only after acquiring a bunch of expensive (and often dubious) talent and now they’ve got no choice but to stay in their lane, which is to say they assist sponsors in pushing liquidity-challenged portcos out on the gangplank to see what floats (because let’s be honest, a ton of the flow out there nowadays is asking for par despite lofty valuation and leverage multiples). The reality is that these shops couldn’t pivot to buying or selling LP portfolios if they wanted to, because they lack the human capital and data infrastructure that such operations require at scale. The reality is also that it only takes one or two leads to obviate the need for a syndicate on a good single asset or multi-asset deal, especially in times like these where transaction sizes have dropped considerably. How many of the desirable opportunities will ultimately make it to the sub-$50mm checks that just take terms and raise their hand for the syndicate? Add to that fact pattern the additional fact that sponsors and agents are losing discipline in what to bring out, so many of these processes become a crap shoot with 50/50 odds of getting done and hold the potential to waste a lot of time with no upside.
I think what we may eventually see is tepid results and eventual fizzling from a lot of these buyers and advisors, and frankly I think it’s deserved. GP-leds make sense as an offshoot and complement of traditional secondaries as an asset class. They do not make sense as a stand-alone strategy, because you can’t generate superior risk adjusted returns in the long run from buying “trophy assets” with a fee wrap at full freight in a market with a lemon problem at terms set by other, larger, better-levered players.
Serves them right, tbh. People sleep on LP constantly while ignoring that it is the backbone and raison d’être of secondaries as an asset class. I often wish that all the thinking and plunder that is wasted on failed GP-leds were instead focused on the white space in LP-led secondaries.
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