Adveq on finding quality in tail-end assets

The Swiss asset manager has seen a lot of tail-end fund interests come to market, but they are often much lower in quality than what the firm is looking for, said head of secondaries Nico Taverna.

How would Adveq characterise private equity secondaries deal flow this year compared to 2014?

So far we’re on a very similar investment track to last year, which is good but we’re a very specialised player in the sense that we aren’t looking to deploy billions. We’ve noticed quite a few tail-end fund assets coming to market and many of them are much lower quality than what we’re looking for.

How do you define low-quality in terms of LP interests in private equity funds? 

A lot of the larger buyout funds coming to market were raised pre-crisis and their underlying portfolio companies are over-levered. Some other buyout funds on the market are centered on geographies that are out of favour. Likewise, venture capital funds for sale have a lot of companies that are 10 to 12 years old and have significant public exposure. Sellers still expect full prices for these fund interests, which is difficult for buyers. We would expect a much more significant discount to justify these risks but price-matching with sellers can be very challenging. While there are a lot of low quality assets in the market, it is not bad. What we see on the small buyout side is still very high quality, but you need to be very close to the segment to source and take advantage of those opportunities.

What types of sellers does Adveq work with the most?

Overall our seller base is quite diverse, we’ve bought a lot from family offices, listed funds and funds of funds, which are becoming much bigger sellers this year. Funds of funds are very professional sellers that are trying to leverage the current environment. They aren’t distressed sellers but they think now is a good time to capture high prices and increase distributions to their LPs.  We’ve always bought from listed funds which are often motivated to wind down tail-end assets. However, that’s a diminishing source of deal flow because many listed funds have less capital these days.

Has Adveq engaged in other types of nontraditional secondaries deals, such as fund restructurings or recaps?

We closed one fund restructuring last year and we’re working on one this year. We’ve noticed a lot of drivers behind these types of deals. Sometimes it’s a GP trying to manage out an old portfolio, sometimes its LPs who want out because they know there’s no chance of a successor fund.

Fund restructurings can be emotionally charged and often take months to complete but how come Adveq only closed one structured deal last year?

Restructurings add a good mix to the portfolio and allow us to deploy meaningful amounts of capital. But, these deals have a lot of moving parts and complex interests that need to be managed. We are aware of these issues and we recognise they can also make deal certainties lower. In the end these deals can fall apart, so we take a pretty selective approach, which explains why we only did one deal last year.