The LP secondaries market is full of opportunity right now, but separating attractive from problematic portfolios requires an underwriting discipline and depth of GP relationships that most investors simply haven’t built, says Patrick Gerbracht, co-head of LP Secondaries at Future Standard.
Drawing on his experience at Future Standard’s $100 billion AUM platform, Gerbracht tells Liquid Courage why middle market valuations are structurally more conservative than the large-cap market, how GPs with aggressive marks are delaying exits, and why continuation vehicles now have a track record compelling enough to permanently change how investment banks advise private equity sponsors.
“The great thing about secondaries is we get to reevaluate the original thesis and ask how things are going,” Gerbracht tells Liquid Courage. “We can bring the macro down to the micro when we re-underwrite these portfolios, and that’s a really powerful tool in an asset class that has done an incredible job of protecting downside on behalf of institutional investors.”
Gerbracht joins host David Snow and co-host Joncarlo Mark, partner at Upwelling Capital, in the Liquid Courage episode, “Future Standard’s First Rule: Know the GP.”
Among the key takeaways of this Liquid Courage episode:
• Middle market GPs consistently mark assets more conservatively than large cap peers. Future Standard routinely sees 10% to 20% gains at exit versus GP marks. Buying at a discount to already-conservative marks creates a powerful upside skew.
• GPs with aggressive marks face a psychological trap. Once an LP sees a 2.3x or 2.4x MOIC on paper, the GP is reluctant to take a haircut to exit. They will then extend, delay, and hope to grow into the valuation, which doesn’t always work out.
• LPs will accept deeper discounts once remaining NAV becomes small enough. The tipping point comes when a fund’s stub piece is no longer meaningful enough to justify the ongoing administrative burden of tracking it. At that point, a 30 to 35% discount becomes rational.
• Knowing the GP is Future Standard’s first rule. GPs control access to secondary transactions and often call preferred buyers directly, making long-term relationships the most important competitive advantage in the LP secondary market.
• Continuation vehicles are reorienting investment banking. When banks visit PE sponsors to discuss exit options, the conversation now routinely includes CVs alongside IPOs and M&A. Gerbracht expects CV volume to grow dramatically over the next five to ten years.
• The cleanup of underperforming assets will be bifurcated by GP quality. Brand-name GPs face real LP pressure to sell and generate DPI; lower-quality GPs below their hurdle may extend holds for years, until LPs eventually force a sale at whatever the market will bear.
Access the full transcript and a searchable library of content at the Liquid Courage Substack.
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