Four buyers, an advisor and a lawyer walk into a room. The room: Debevoise & Plimpton’s offices in midtown New York; the aim: to discuss recent market developments for sister publication Private Equity International’s secondaries roundtable.
The discussion comprised executives from Ardian, Debevoise & Plimpton, Greenhill, HarbourVest Partners, ICG and Partners Group, and will appear in PEI’s May issue. Here’s a preview of what was discussed.
Expect more Norinchukins
Ten years ago, there were only one or two $1 billion deals a year; now, they’re much more common. Participants agreed Japanese bank Norinchukin’s process to offload $5 billion-worth of private equity fund stakes “won’t be the last” portfolio of this size seen in the market.
These deals have implications for the way secondaries buyers conduct processes; Ardian, for example, likes to bring in its LP co-investors to syndicate deals, “especially the $1 billion-plus transactions”, according to managing director Daryl Li.
The participants are likely to be right. Secondaries Investor has heard from at least one Asia-based source that a wave of regulation-driven sales by Japanese financial institutions could hit the market in the next few years. Add to that CIOs around the world wanting to de-risk 10 years into a bull market and the conditions for more mega-sales are ripe.
A downturn could be a good thing
While some participants warned that bid-ask spreads could widen in the event of a recession, the general consensus was that a downturn could present greater opportunities for buyers, particularly for GP-leds. A market disruption would impact PE shops’ business plans for their assets, something that would create a “natural driver” for rolling assets into continuation funds, according to Debevoise partner John Rife.
Of course, necessity is the mother of invention. In the last downturn, market participants learned to adapt to changed conditions and became more creative with deal structures such as using preferred equity and structured joint ventures, said Michael Pugatch, managing director at HarbourVest.
The market is outgrowing its shoes
There are more than enough deals to go around in both the LP portfolio and GP-led arenas. One participant said the proliferation of opportunities has grown faster than industry resources; buyers are increasingly needing to “triage” what they look at, quickly narrowing the deal funnel to opportunities that fit their strategy or for which they have an operational advantage.
Partners Group, for example, invests in around 2 percent of opportunities it sees, and all firms noted they’ve been hiring to expand the universe of investments they cover or to gain specialised skills.
Good news for those looking for gainful employment in secondaries – there’s a wealth of investment firms and service providers hungry to capitalise on a blooming and booming market.