During an interview in August 2024, 
As for the specific features of secondaries, they shorten the overall J-curve of the multi strategy by returning capital to investors more quickly than primaries and co-investments. Indeed, he noted that their secondaries generally achieved a break-even point after around three years compared to eight years for primaries. Both figures are comparable to what is seen elsewhere in the industry. Moreover, he observed that secondaries tend to have a lower money multiple but a higher IRR, helping the performance of the multi strategy.
Swancap generally provides the performance data points only to limited partners (LPs). Paperjam had access to some of them and noted that investments in secondaries have returned better results, both in terms of TVPI and IRR (more than 2X and 30%, respectively), compared to primary funds and co-investments.
“We buy secondaries, like a secondary fund,” stressed Mansfeldt. Swancap would generally buy an existing fund a little bit earlier than halfway through its life, “so that there is still potential for value creation in its remaining life.” In other words, the firm is more attracted by a four or five-year-old fund than a seven-year-old fund to ensure that there is still some “runway left to extract value” from the remaining portfolio of companies. Yet he admitted that they could be tempted by very old funds but with a “bigger discount.”
Mansfeldt explained that they invested in more than 50 secondaries amounting to over $1bn. Swancap also buys secondary fund portfolios from LPs. He does not consider the firm a major player in the industry, as it has about $100m to $200m dedicated to the asset class, meaning that it will generally invest $5m to $20m tickets for a fund or a portfolio of funds.
Are secondary funds safer than primary funds?
“It should be less risky if you can achieve the same level of diversification as a primary fund of funds, which is not always easy,” commented Mansfeldt. Even with less diversification, one must account for the fact that a fund holds proven assets with several years of experience under new ownership. These leveraged companies have shown a capacity to sustain and service their debt and some may even have started to reduce gearing. “A shorter journey to the exit should [also] mean low risk.”
Not all is bright blue sky. Mansfeldt warned that investors may be confronted with “sub optimal assets” in the coveted portfolio. Sellers may have some great brands in the portfolio but may require selling “the whole basket” under a “take it or leave it” transaction. “That’s the advantage of the primary agenda. You can then just choose your favourite [funds].”
Discounts have slowly disappeared over the last year
For top performing funds, “medium aged prime” with some remaining upside, he noted that LP-led deals are currently priced with a discount ranging from 0% and 10%. “People will compete for those assets.” Ceteris paribus, he observed discounts ranging between 15% and 30% for older funds.
“We don’t see much of a discount to NAV in either continuations fund or continuation vehicles,” he said. These are GP-led secondaries. A continuation fund is set up to park some old deals from maturing funds, whereas the continuation vehicle carries single assets which demand co-investment skills to assess the deal. “It’s usually transferred around the carrying value.”
We are not investing in distressed funds. We prefer the opposite
The absence of a discount comes as no surprise given that these portfolios/companies are generally transferred to the CF or CV because they maintained a strong performance. GPs avoid giving up value through a quick sale to quicken the closure of an old fund.
Mansfeldt commented that discounts have reduced, as market sentiment has improved in the last year. It reflects the stabilisation of rates “helping pricing and predictability of finance.”
Sniffing around for distressed funds?
“We are not investing in distressed funds. We prefer the opposite,” said Mansfeldt. Swancap prefers to invest in “well-performing funds” at reasonable prices in the secondary market. As per the firm’s experience, the performance has been better when investing into well-performing funds than when investing in a troubled fund despite the deeper discount. Its mantra, Sleeping Well At Night (the Swan in Swancap), may also drive Swancap’s approach on distressed funds.
Are secondaries taking advantage of market stresses better than primaries?
“The theory makes sense… people who are distressed… they [tend] to sell at a big discount [creating] extraordinary opportunities.” He continued: “it actually just hasn't been our experience.” He suggested that when an investor is distressed on the back of margin calls, for instance, “he will sell everything else first… the liquid stuff… as he needs the cash now.” Mansfeldt added: “These [distressed funds] cannot be sold that fast.”
Swancap seeks opportunities in opaque markets with “sub institutional sized tickets or portfolios.” He commented that their typical ticket size does not usually involve banks and brokers which result into “less perfect market pricing.” Otherwise, Swancap finds opportunities at attractive prices in complex transactions due to some ownership structures, such as when estate issues arise following a death or a divorce in high-net-worth families. “A true distress seller is a bit of a myth.”
Has the European Investment Fund invested in your funds?
“Amongst other things, we invest, globally or particularly in North America, which would not fit their criteria,” stated Mansfeldt. Contrary to the EIF, which has a political (development of new managers and for regions) and a return agenda, he argued that the sole focus of Swancap is on performance while accounting for ESG factors.
Alignment of interest
Swancap does not invest its own capital in its funds. On the other hand, Mansfeldt stated that: “as customary… the team making the decisions about the investment… invests alongside investors via a pooled vehicle in all our funds… this is both an obligation and a desire.”
Give credit to secondaries when it is due
Mansfeldt stated that Swancap wants to launch its first pure play secondary portfolio in December 2024 on the back of investors’ demand following a strong track record as a component in multi-strategy funds.
