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‘Absurd’ transactions and a $5bn deal: takeaways from Cannes

Five surprising themes emerged from secondaries discussions on the French Riviera this week.

Secondaries was a popular theme as private equity executives gathered for the fourth IPEM event in Cannes this week. Here are the main takeaways from discussions involving Campbell Lutyens, AlpInvest Partners, Greenhill and Northleaf Capital Partners, to name a few.

The jury’s still out on single-asset restructurings

The prevalence of single-asset transactions was one of the key themes last year with firms including PAI Partners and TDR Capital running such processes. Not all, however, are convinced of their merit. Panellists raised doubts about concentration risk and why the asset should price higher on the secondaries market than in a secondary buyout deal.

“For my part, I find this completely absurd,” said Olav Ostin, managing partner of venture capital directs specialist TempoCap. “If you can’t sell the asset, there’s a problem with it.”

A slow Q1 is giving pause for thought

Preliminary estimates from Campbell Lutyens and Greenhill point to transaction volumes of $70 billion-plus for last year. Predictions for 2019, though, were mixed. Many said they expect a slow first quarter as public market volatility forces sellers to write down the value of their portfolios. Marco Wulff, a partner at Montana Capital Partners, said he could see volumes falling to below $50 billion this year if there is a recession. At the same time, a partner at one of the mammoth secondaries firms told Secondaries Investor that even with a slow start to the year, he wouldn’t be surprised to see volumes exceed $80 billion in 2019, including the first $5 billion-plus deal.

The clampdown on GP-leds is beginning

Last year the Securities and Exchange Commission censured a firm over conflicts of interest related to a GP-led deal for the first time. Other regulatory bodies appear to be following suit. According to Ostin, TempoCap bought a portfolio that it wanted to manage in partnership with the selling GP. When the firm tried to assign some carry to the GP in the LPA of the new vehicle, the French regulator said “non”. Panellists expect stronger pushback from regulatory authorities this year.

Investment banks are nipping at advisors’ heels

GP-led transactions rose to around 38 percent of deal volume last year, according to preliminary figures from Campbell Lutyens. With this growth has come new entrants to the advisory side, with investment banks (Citi is the latest publicly known example) keen to get a slice of the GP-led pie.

“They clearly indicate that they don’t understand the space,” said Immanuel Rubin, a partner at Campbell Lutyens. “It will be quite interesting to see whether they push into single-asset transactions.”

The future for preferred equity’s growth is unclear

While firms including Northleaf and Montana have closed preferred equity deals, the strategy is unlikely to exceed its current 4-5 percent of deal volume. The strategy has “more legs” in a bull market because sellers are more optimistic about what the final outcome of their holdings are going to be, so preferred equity doesn’t look as expensive, according to Commonfund’s Cari Lodge.

“It will be interesting [to see] what happens to that segment of the market if the market goes through a down cycle,” Lodge said.

Others were more explicit. “It will remain irrelevant,” said Glendower Capital chief executive Carlo Pirzio-Biroli, while Montana’s Wulff said the strategy would continue but “is not going to skyrocket”.

That said, Secondaries Investor has heard there’s a high-quality, London-based GP looking to do a portfolio-level preferred equity fund financing to the tune of $500 million-$1 billion.

Do you agree with the panellists’ comments? Let us know: adam.l@peimedia.com or rod.j@peimedia.com