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 are involved for these intricate single asset GP-led investments?
NW: To identify and invest in such businesses, we have developed a dedicated sourcing effort focused exclusively on deal origination and GP relationship development, perform painstakingly deep analysis of the asset during the due diligence process, and lead a complex negotiation encompassing a wide array of stakeholders while seeking to ensure strong alignment. We believe our experience enables us to develop partnerships and achieve fair terms for all parties, which has established Morgan Stanley as a preferred partner for GPs.
Disclaimer: The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.
Nash Waterman, Portfolio Manager and Head of Private Markets Secondaries, Morgan Stanley Investment Management – Nash is Global Head of the secondaries team and an investment committee member at Morgan Stanley Investment Management. With more than 21 years of industry experience, he is the lead portfolio manager for all MSIM’s funds that are focused on GP-led single asset secondaries. During his tenure, Nash has either led or participated in every GP-led continuation vehicle transaction executed by the team. Prior to originating secondary strategy at Morgan Stanley, he was a member of the quantitative strategy group supporting the MSIM value equity teams. Nash received a BA in economics and German from Duke University and an MBA from the Wharton School of the University of Pennsylvania.
