RCP Advisors is an active secondary purchaser of limited partner interests in private equity funds. Secondary funds possess attributes which may be particularly attractive, including the ability to purchase private equity assets at a discount, a shorter holding period and earlier cash returns, a muted “J Curve”, and reduced blind pool risk.
RCP’s secondary activities are further distinguished by the fact that we focus exclusively on North American lower middle market buyout funds. This is an important distinction due to the special characteristics of this market and to the special advantages that RCP Advisors possesses as a leading player in this market.
The secondary market for private equity funds is still a relatively young one, although it is steadily growing in terms of size and market efficiency. Until recently, the lower middle market was not fertile ground for organized and consistent secondary activity. This is because the funds in this market are smaller and, as such, there is less opportunity for significant secondary volume in any one name. Also, information on these funds and their portfolios can be more difficult to obtain. This makes the accurate underwriting and pricing of these investments more difficult. These problems with size, access, and information make this market uneconomical for many major secondary funds to justify making this a major focus.
Since the Firm’s inception, RCP has focused exclusively on the lower middle buyout market. With this comes a wealth of relationships and research information on funds and companies that is valuable for secondary market activities. The relationships that RCP has with lower middle market GPs are valuable in sourcing secondary opportunities, obtaining high level access to pricing research, and obtaining consents for transfer. Approximately half of RCP’s secondary purchase volume is either sourced proprietarily through GPs or is in partnerships in which RCP’s primary funds are already an existing investor. RCP believes that its information and access advantages along with its bottom-up underwriting process give it a number of important advantages as a secondary investor. RCP’s focus on smaller secondary purchases in smaller funds affords RCP the opportunity to find significant value in a market that may be too small or opaque for larger competitors.