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3i-managed Action’s troubles highlight single-asset risk

The retailer at the centre of one of last year's largest single-asset deals is preparing for a 'very tough' Q2.

A 3i Group-managed retailer is gearing up for hard times ahead, shedding light on the risks inherent in single-asset secondaries deals.

In an investor presentation last Thursday, the London-headquartered private equity firm’s chief executive Simon Borrows outlined a hypothetical “hunker-down” scenario for Action, the Dutch discounter at the centre of a GP-led process on 3i’s Eurofund V.

In the event of a “complete lockdown” where all stores are closed for an extended period, the company could reduce its monthly expenses to €26 million, from an average of around €113 million. This would involve cutting its store and wage bill and significantly reducing rents either through local emergency provisions or negotiations, Borrows said.

As of mid-March, 700 of the firm’s 1,575 stores were open, according to an accompanying presentation. Its 523 stores in France will be allowed to re-open in order to sell only essentials.

Action’s cash balance of €300 million and a revolving credit facility of €100 million means “you don’t need a calculator to see that Action can hunker down for far longer than even the most pessimistic scenarios for covid-19”, Borrows said, while acknowledging that Q2 will be a “very tough quarter”.

Secondaries Investor reported in November that Action, the sole remaining asset in 2006-vintage buyout fund Eurofund V, had been rolled into a series of vehicles managed by 3i. The private equity firm maintained a majority stake with rolling and new institutional investors such as Coller Capital, HarbourVest Partners and Pantheon making up the difference.

The deal gave the retailer a post-discount enterprise value of €10.25 billion, equivalent to 18.2x the 30 September run-rate EBITDA.

The downturn caused by coronavirus is the first real test of the highly-concentrated secondaries deals that closed last year, when the volume of single-asset deals more than doubled to $5 billion, according to research by Evercore.

Several secondaries buyers Secondaries Investor spoke to are examining their portfolios to get a better idea of their exposure to the sectors most hurt by the covid-19 crisis such as traditional retail, transportation, and oil and gas.

“On the buy-side, people will be even more focused on concentration risk [as a result of coronavirus] and the specific risk that a company represents,” said one senior UK-based buyer.

“The LPs all did thorough due diligence and some have, of course, been investors for many years in Action,” a spokeswoman for 3i told Secondaries Investor. “This puts them in a much better position than when they’re invested in a portfolio where they may not understand each company in much detail and be more likely to experience unpleasant surprises.”

Coller Capital declined to comment. HarbourVest and Pantheon did not return requests for comment.