Five Questions with Brian Talbot and Tristram Perkins of Neuberger Berman

You just closed your fourth secondary fund on $2.5 billion. How will you navigate the high-priced environment?

Talbot: We’ll navigate it in a fashion similar to how we navigated the first three funds, with a focus on the middle market, medium-sized transactions — around $25 million, typically buying a single asset or a smaller pool of assets. We’re different from the megacap side of the market, which is extremely competitive and pricing is high.

Do you focus on buying traditional LP stakes or do you look at GP-led transactions?

Talbot: We’ll look at both. Historically we’ve done more investing in the traditional LP fund space, but as the GP-led space has grown, the quality of assets trading in that space and the quality of GPs leading those deals has improved. We’re become more active in that space. Over the last four or five years, we’ve closed about a dozen deals committing about $400 million.

GP-led deals can be risky in the sense that money is spent and the deal eventually doesn’t get done. Do you see a higher likelihood of success going forward?

Perkins: [Sometimes those deals fail for] the same reason you’re seeing high pricing in the LP fund space: There’s a lot of liquidity coming out of private equity over the last two years, which has made investors comfortable in the asset class. In the lower yield environment, there is more demand for private equity in general.

With the public markets surging, your relative exposure to private equity lags a bit to your target. All those factors make it a tougher environment to convince LPs to sell, whether traditional LP sales or GP-led processes.

Why have GP-led deals become more palatable for LPs?

Perkins: The structure of those deals has improved for LPs. The early [GP-led] deals were somewhat coercive; the recent deals you’ve seen are a purely structural option for legacy LPs, as opposed to forcing them to sell at a discount or step into a new, longer duration structure.

Talbot: GPs were using a restructuring as a means to give themselves a lifeline for a few more years. What has changed is the quality of the deals. There are very good GPs who have raised follow-on capital, who have good, strong businesses, but utilize the secondary market to provide a liquidity option for investors in some older funds.

Expectation is volume will drop off in 2016 compared to prior years. What’s your outlook for 2017?

Talbot: Volume will be comparable to last year, $35 billion to $40 billion. Our pipeline is very strong. We’ve talked with most sell-side agents and they’ve told us their pipelines are good. We’re expecting a robust year. The GP-led secondary space is probably the fastest growing now.

Perkins: We’ll continue to see public pensions, sovereign-wealth funds, endowments, foundations, private pensions. … Even without the banks being all that active, we’ve still managed to have really high levels of secondary volume, which reflects the increasing use of the secondary market as a portfolio-management tool by big institutional sellers.

There’s a good amount of money flowing into private equity, and a fair amount of that is from new investors into the asset class. If the public markets were to bounce around a bit, if history repeats, those new investors to the asset class may be the first to look to lighten up through the secondary market.

Photos of Brian Talbot and Tristram Perkins courtesy of Neuberger Berman