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3 quotes from 1 episode on Secondaries Investor: Second Thoughts, each with a timestamped link to the source.
John Kettnich states limited partners take an active stance on portfolio liquidity. Annual private equity distributions dropped to 10%, driving institutional investors toward collateralized fund obligations.
Mature secondary funds provide reliable collateral because diversification across thousands of underlying companies generates cash on a weekly basis.
“If you think about mature secondary funds that get liquidity every week, some form of liquidity hits a mature secondary fund probably every week as they are diversified across thousands of companies. That is a good potential candidate for a CFO.”
From Why Most Private Equity Portfolios Fail CFO Structuring
Limited partners historically waited for general partners to sell companies. Low cash returns over recent years forced investors to pursue liquidity directly through alternative structures.
“Historically you commit to a fund, you just can kind of sit back and in many cases LPs took the view, 'I'll sit back, I'll wait for my liquidity to come when the GP sells the company. I'll get my liquidity. It'll follow a certain cash flow profile.' That era, not that that's gone necessarily, but I think in the last few years LPs have been forced to take a bit more of a proactive stance to liquidity.”
Collateralized fund obligations divide private equity assets into risk tranches. Insurance companies buy the debt sections for the credit profile, while equity investors retain the upside.
“There's a ton of demand from insurance companies that's come in because it's a pretty attractive credit profile, and so it just lines up different investors across the asset classes that we all operate in. It allows equity investors to keep their upside, allows credit investors who want that risk-return profile associated with the A, B tranches of these CFOs to get the exposure that they want.”
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