Wild West no more

An entrepreneur by background, Peter McGrath says he was looking for a new challenge when he came across the secondaries market back in 2002. And what a challenge it was. As McGrath himself recalls: “It was virgin territory. There were no intermediaries at the time, so it was a bit like the Wild West.”

On the same theme, he continues: “There were not too many buyers or sellers. Secondaries was quite a taboo subject back then. People did not use it as a portfolio management tool, it was only for distressed or special situations. Often when someone sold, it meant they were getting out of the asset class altogether.”

Luckily for McGrath, things have moved on a lot since then. He founded Toronto-based institutional advisory firm Setter Capital in 2006 and says the firm has completed over $10 billion of secondary deals in the last five years in the private equity, real estate and infrastructure spaces.

During this period, he says, the market has been quite cyclical, but “while the business has been gaining momentum over the last few years, we feel like we’re breaking from the pack as our coverage of the market is quite unique”.

In suggesting distinctiveness, McGrath is referring to such things as the Setter liquidity ratings – which measure buyer demand for particular funds – and Secondary Link (www.secondarylink.com), the firm’s new online platform, where buyers of secondary interests can connect with each other and see who is “following” particular funds.

“The idea for SecondaryLink came out of research which highlighted that the number of buyers and sellers is growing so quick that it’s mind boggling,” says McGrath. “Over 300 buyers have signed up in its first month and half, and these are institutional investors who are very keen to transact. Will they actually do much initially? Maybe not in the early days, but in a year or two they will.”

McGrath explains what SecondaryLink is – and what it’s not. “It’s not an online exchange,” he stresses. “SecondaryLink allows investors to anonymously list themselves as buyers for specific funds and for sellers to search over 4,000 funds and connect with the relevant buyers of each fund. You can look at the profiles of others and invite them to connect and collaborate on diligence and secondaries. Essentially, it’s about creating a collaborative and confidential community.”

But is the platform not also open to firms competing with Setter for business? McGrath concedes that it is – but he doesn’t appear too worried by that. “Many who have signed up are agents and they are competition to Setter Capital. So some people ask why we would do that. Setter Capital and SecondaryLink are two separate companies. My view is that SecondaryLink will be useful and relevant to the secondary market community by being open. For Setter Capital and for other agents, my hope is that the site will lead to more buyers and sellers interacting and engaging the market and ultimately more deals taking place.”

Critical mass

He adds: “Although the site is independent from Setter, it is powered by proprietary data and metrics developed by Setter Capital, such as the Setter Liquidity Rating. We hope it brings more transparency to the markets and makes them more accessible to the burgeoning number of buyers and sellers.”

As you would expect given the relative maturity of the asset classes, private equity and real estate funds are on Secondary Link in greater numbers than infrastructure funds – though infrastructure has a material and growing presence. The growth of all three asset classes will contribute to the eventual critical mass that, in McGrath’s view, will then produce real value for users.

For the time being he’s happy to reflect on how far things have come in a short period, with hundreds of users signed up already. “It took a year to set this up and we pretty much had to guess how people would want to interact,” he reflects. “And I believe we have guessed pretty well.”