A look inside the EIF’s commercial secondaries venture

The EIF began backing LP-led transactions in buyout funds and hybrid debt-equity funds before investing in GP-leds in 2017, head of secondaries Joaquín Alexandre Ruiz Tarré tells Secondaries Investor.

The European Investment Fund is looking to scale up its secondaries investments over time while also leveraging the market to sell its own positions.

The institution, which is part of the EU’s European Investment Bank Group, will seek to do two LP portfolio sales per annum provided the market conditions are appropriate, reigniting the approach to active portfolio management it took before the pandemic, Joaquín Alexandre Ruiz Tarré, head of secondaries at the EIF, told Secondaries Investor. In 2015, the European LP began undertaking portfolio sales on an annual basis, selling 25 to 30 LP stakes.

Its portfolio grows “give or take” 10 percent every year with a significant proportion of mature funds, Ruiz Tarré added.

The EIF provides finance to SMEs across Europe and aims to generate around €145 billion in investments for businesses, households and individuals. The fund has €4.6 billion in AUM per Secondaries Investor data and commits to private equity and venture capital funds focused on the region.

Rather than hiring an adviser, the EIF’s secondaries team runs the process itself alongside its internal legal team and external lawyers. “The sell-side is kind of a small M&A boutique within the firm,” Ruiz Tarré explained.

Having adopted a wait-and-see approach following the outbreak of the pandemic and then Russia’s invasion of Ukraine, the EIF is gearing up to reactivate its selling activity. Ruiz Tarré anticipates its transactions will be between €200 million and €400 million in aggregated net asset value.

“Fortunately, EIF doesn’t have liquidity issues,” Ruiz Tarré said. “It’s an active, regular portfolio management – and of course, it has the benefit… that part of these proceeds or all of these proceeds can be recycled and recommitted into new commitments the year after or the same year over a certain period of time.”

A commercial venture

Around 2016, the EIF made the decision to invest its own balance sheet capital in investments that offered the opportunity of higher return than “money in the bank account” in an environment of declining yields.

Ruiz Tarré, who was given the task, landed on secondaries as an area where the investment fund could deploy capital and generate returns quickly for its treasury. The EIF began doing LP-led transactions in buyout funds, hybrid debt and equity funds before investing in GP-led transactions in 2017 and 2018.

In 2019, the EIF closed on its debut secondaries vehicle, EIF Secondaries Fund, which raised €100 million from private institutional investors. The fund has backed five transactions to date: two LP-led deals involving hybrid debt equity stakes and three GP-led transactions comprised of two multi-asset transactions and one single-asset deal. The fund, which will complete around 15 deals, will be around 30 percent committed in February should the team sign another GP-led secondaries deal it expects to close. The team comprises five secondaries professionals and two valuation experts.

There is also room for co-investment to bring up its ticket sizes. The fund and one of its cornerstone investors completed a €50 million LP-led transaction, for example, Ruiz Tarré said. “I would not be surprised that, between the fund and co-investments, we end up at €200 million or more [in size].”

A host of relationships

The EIF is leveraging its circa 550 GP relationships and 1,300-plus fund interests across buyout, development capital and venture capital to find its dealflow.

When it comes to GP-led transactions, the fund is looking to back quality assets managed by blue chip players predominantly in the buyout space. The fund also considers hybrid debt equity and growth GP-leds. Venture capital is not part of its strategy, Ruiz Tarré said.

The majority (70 percent) of the vehicle’s fund level commitments have to be made to investments within the EU and those countries within the European Free Trade Association. However, within those limits, the fund could invest in a fully UK-focused transaction, for example. Ruiz Tarré doesn’t anticipate it will do a US-based transaction: “I’ve always been of the view that… you should be more or less a two-hour flight from the GP office.”

While the fund is a commercial venture, given the EIF’s overarching policies, Ruiz Tarré also likes transactions that have a follow-on capital angle where cash is being used to continue to support assets moving forward.

“If there is something that defines us and the way we look at this… [the] EIF is an expert in doing blindpool investments and we’ve been an expert in finding first timers that have then succeeded, or emerging fund managers that have then become established… blue-chip [managers]. So, assessing the blind pool element, that’s our core expertise.”

The EIF has also been pushing very hard for GP-led transactions it invests in to follow the Institutional Limited Partners Association’s guidelines by the book. “The EIF doesn’t want… and I don’t want this team and this activity – this fund – [to be a] part of a GP-led transaction where there’s not a win-win-win for everyone,” Ruiz Tarré said. “The EIF is known in the market for being quite difficult on terms and conditions and this is one of the aspects that we focus on.”

Room for growth

While the EIF is a small investor given its fund size, the team has lofty ambitions.

The EIF was the lead investor on the two LP-led transactions the fund has invested in. While the vehicle is either acquiring one to three stakes in funds making these small sales or a part of a mosaic solution, its relationships have played to its strength.

“The GP will not veto the transfer from the seller to us. Actually, they will be happy that we are replacing an investor that wants to leave taking into account that EIF is seen as a very long-term investor,” Ruiz Tarré said.

The fund has been involved at the outset of origination on the GP-led transactions it has backed, one of which Ruiz Tarré originated himself and guided the GP toward conversations with counterparties.

Like other buyers, managers have also reached out once they have kicked off a GP-led process. “There are other situations where it’s going to be the first time for the GP, even if it’s an established player, and they’re coming to us because we are the largest LP or one of the largest LPs,” Ruiz Tarré said. “That’s how we start intervening and we start also trying to educate them how to do this properly, and that has happened quite a number of times and it will continue happening.”

Ruiz Tarré anticipates its second-generation fund should be “at least” €200 million in size. His personal ambition is to raise €1 billion in “three, maximum four fund generations”.