Adams Street: secondaries volatility will scupper large leveraged deals

Adams Street Partners has said an increase in volatility in the secondaries market will lessen the ability to secure leverage for large deals.

A memo produced by the Minnesota State Board of Investment, which has backed Adams Street Global Secondary Fund 6, notes the recent and expected increase in volatility will “likely decrease the ability of competing secondary buyers to use leverage to purchase large portfolios at high prices”.

This will likely result in more sales being broken up into smaller portfolios or single deals, SBI noted.

Adams Street is seeking $1.2 billion for its sixth flagship secondaries fund. SBI approved a commitment of up to $100 million, the memo shows.

While Adams Street does not intend to use leverage as part of its underwriting process, it plans to use a credit facility of up to 30 percent of aggregate commitments – around $360 million – in its latest vehicle, Adams Street Global Secondary Fund VI, to back smaller deals.

“With credit facilities, fund investors see less frequent capital calls and a much smaller percentage of committed capital called in the first 1-2 years of a fund’s life than would otherwise be expected,” a source with knowledge of credit facilities used by secondaries buyers told Secondaries Investor.

Such facilities can also help with more effective recycling and re-commitment of early distributions from secondaries investments, making it easier to ensure investors’ commitments are fully put to work, the source said, adding that unlike deal-level leverage, a borrowing facility isn’t used solely for the sake of boosting returns.

The memo said the Fund 6 will focus on acquiring stakes that are three to eight years old, and the management team contribution to the fund is 1 percent.

Fund 6 will pay Adams Street carried interest of 10 percent after a hurdle rate of 7 percent has been achieved.

The fund will levy a management fee of 1 percent on the first $25 million committed by a limited partner to the fund, with reductions on the fee down to 0.5 percent on capital between $100 million and $150 million, and 0.4 percent on amounts over $150 million. Fees will then begin to wind down six years after the first investment, a date from which the annual management fee reduces by 10 percent of the original annual fee, and by 10 percent of the original fee on each anniversary thereafter, the memo notes.

Adams Street’s previous secondaries fund, a 2012-vintage $1.1 billion vehicle, was recording a net internal rate of return of 1.8 percent and a 1.03x multiple on invested capital as of 30 September. Its 2009-vintage $738 million Adams Street Global Opportunities Secondary Fund II recording a net IRR of 15.9 percent and a 1.6x multiple as of the same date, according to the memo.

It is understood Chicago-headquartered Adams Street will invest in fund interests, direct secondaries transactions and GP-led transactions with its latest fund.

Adams Street declined to comment.