Michael Hacker, Partner and Global Head of Portfolio Finance at AlpInvest, on trends in secondary investment

In the latest ION Influencers Fireside Chat, host Giovanni Amodeo spoke with Michael Hacker, Partner and Global Head of Portfolio Finance at Carlyle AlpInvest, about the evolving landscape of secondary investment. The discussion covered market evolution, GP-led secondaries, NAV lending, private credit secondaries, and talent acquisition in the space.

1. The Evolution of the Secondary Market

Michael Hacker provided a historical perspective on how the secondary market has grown from a niche segment to a critical liquidity tool:

Key Milestones:

• Early 2000s: Secondaries were a backwater market, with limited understanding from GPs and LPs.

• 2008 Financial Crisis (GFC): A turning point—investors realized the need for liquidity solutions amid frozen exit markets.

• 2010s: Rise of GP-led secondaries and structured liquidity solutions.

• COVID-19 Pandemic: Accelerated adoption of secondaries as LPs sought portfolio rebalancing.

• Post-2022 (Rate Hikes & Market Volatility): Increased LP demand for liquidity due to denominator effect and slower exits.

Current Market Dynamics:

• $100B+ annual secondary volume (2023 estimates).

• GP-led deals now ~15% of sponsor exits (vs. negligible a decade ago).

• NAV lending & portfolio finance emerging as complementary tools.

2. Why Investors Use Secondaries

LP Motivations:

• Liquidity Needs: With fewer exits, LPs use secondaries to rebalance portfolios.

• Vintage Diversification: Selling older fund stakes to maintain target allocations.

• Capital Recycling: Freeing up capital for new commitments.

GP Motivations:

• Retaining Top Assets: Continuation funds allow GPs to hold winners longer.

• Providing LP Liquidity: Meeting investor demands without forced exits.

• Fund Life Extension: NAV loans help manage tail-end portfolios.

3. GP-Led Secondaries & Continuation Funds

What Makes a Good Continuation Fund?

• High-Quality Assets: Focus on star companies, not under-performers.

• Clear Value Creation Plan: GPs must articulate next-stage growth (M&A, operational improvements, etc.).

• Alignment of Interests: Management and GPs should reinvest alongside buyers.

Common Pitfalls:

• “Dumping Ground” Deals: Some GPs try to offload hard-to-sell assets—buyers are wary.

• Poor Structuring: Early deals (pre-2020) had misaligned incentives; today’s transactions are more LP-friendly.

Due Diligence Process:

• Assessing GP Track Record: Does the team have sector expertise and a repeatable strategy?

• Exit Pathway Analysis: Are there realistic buyers if the asset were sold traditionally?

• Management Commitment: Are key executives rolling equity into the new vehicle?

4. NAV Lending & Portfolio Finance Trends

How GPs Use NAV Loans:

1. Targeted Follow-Ons: Funding high-growth portfolio companies when fund capital is exhausted.

2. Fund Optimization:

LP Sentiment:

• Initially skeptical, but acceptance is growing for low-LTV (10-20%) deals.

• ILPA (Institutional Limited Partners Association) is providing guidelines for best practices.

5. The Future of Secondaries

Private Credit Secondaries: The Next Frontier

• Still Nascent (~$10-12B in 2023 volume) but growing rapidly.

• GP-led credit continuation funds are emerging, mirroring PE trends.

• Challenges include valuation complexity and alignment structuring.

Talent in the Secondary Market

• Cross-Disciplinary Demand: Hiring from PE, credit, banking, and insurance.

• No Formal Training: Unlike traditional investing, secondaries require on-the-job learning.

• Key Traits for Success: Intellectual curiosity, structuring expertise, and deep GP relationship skills.

Key Takeaways & Strategic Insights

1. Secondaries Are Mainstream: No longer a last resort—now a core portfolio tool.

2. GP-Led Deals Dominate: Continuation funds are here to stay, but quality matters.

3. NAV Lending Growth: Expect more adoption as GPs optimize fund performance.

4. Credit Secondaries Rising: A high-growth segment with untapped potential.

5. Talent War Intensifies: Firms need versatile investors to navigate complex deals.

Final Thought

The secondary market has evolved from a liquidity backwater to a strategic necessity for private markets. As GP-led deals, NAV lending, and credit secondaries expand, investors must stay ahead of trends to capitalize on opportunities.

Key timestamps:

00:07 Introduction to the Fireside Chats
01:44 Evolution of the Secondary Market
03:30 Market Dynamics and Liquidity Factors
05:25 Investor Perspectives on Secondary Solutions
07:20 GP and LP Dynamics in Secondary Markets
08:32 Assessing Continuation Vehicles
10:56 Evaluating Value Creation Strategies
13:01 Identifying Effective GPs
15:19 Diligence Process and Key Indicators
16:46 Trends in Fund Finance and NAV Lending
19:04 Optimizing Fund Investments
20:23 Building Strong GP Relationships
22:48 Sector Specialization in Secondaries
24:48 Growth of Private Credit Secondaries
26:46 Attracting Talent in Emerging Markets