AlpInvest Partners on Monday announced it had held the final close on its sixth secondaries programme, including $3.3 billion of capital for its commingled fund. Wouter Moerel, the firm’s head of secondaries, tells Secondaries Investor about how the firm’s investor base has evolved with its latest programme and its strategy for deploying the fund.
The size of your commingled fund has more than quadrupled. What is the reason behind this?
WM: In our previous programme we had $5.1 billion in commitments to invest, of which $750 million was in the commingled AlpInvest Secondaries Fund V and the remainder of which was in separately managed accounts. AlpInvest Secondaries Program VI received $6.5 billion in commitments, of which $3.3 billion is in the commingled vehicle and $3.2 billion is in separately managed accounts. So the step-up is from $5.1 billion to $6.5 billion, which coincides with our investment pace and what we deem we can wisely invest in the next four years.
Under the hood, we’ve changed significantly the composition of our investor base. We reduced some of the larger separately managed accounts and diversified it toward new institutional investors. Most of the new investors wanted to commit to the commingled vehicle, ASF VI. It’s the same team, same strategy, same approach, it’s just that the market has grown and we’re growing with the market.
How has the investor base evolved since your previous programme?
WM: We have always had two large clients for whom we invested capital exclusively up to and including Fund IV, which were APG and PGGM. We had agreed with them, at the time the company was bought by Carlyle, that they would become a smaller percentage of the total fund size over time, so we’d diversify the investor base.
In ASP VI, we added over 80 new investors to our investor base and these represent over 50 percent of the $6.5 billion in commitments.
What do you think investors found attractive about your strategy?
WM: We have a strategy that looks at two sides of the market: on one hand the traditional LP interests, on the other hand, more GP-led transactions – together with a GP we do a management buyout of an existing portfolio that they’re managing, and/or having a stapled commitment to their next fund, and/or setting up a new fund.
We’re also global – we’ve recently begun investing more in Asia as we deem that investment opportunities and valuations are attractive. We think about what enterprise value over EBITDA do we get in, and how does that compare with what we see will be the future value creation. At this moment we believe Asia is attractive from a risk/return perspective.
In our first four funds, 90 percent of the value that we created was driven by EBITDA and fair market value growth, and only 10 percent from buying at a discount.
What levels of pricing are you seeing for energy stakes?
WM: We don’t think about the world in terms of pricing and premiums. Discount and premiums are important for a seller as a reference point. We look much more at, what portfolio of companies are we buying, at what entry multiple, what value creation is left and at what exit multiple. That gives us a price today because we want to make a return between the two. Whether that’s a discount or a premium, is less relevant. We look at the underlying portfolio company fundamentals, the buy-in multiples, the future value creation and the quality of the GP that is managing these portfolio companies. We believe to have a more direct investment approach than most secondaries players. To that end, we have built a team, the majority of which comes from the direct buyout side.
Does the record amount of capital for secondaries and dry powder worry you?
WM: This market has been competitive for a while. If you look at the amount of capital, available secondaries dry powder versus annual market volume, you’re looking at one and a half to two years of deals in dry powder. Compared to the buyout industry where they’re looking at five to six years, I think we’re still pretty well balanced.
We can execute transactions across the spectrum, from $10 million to $2 billion plus and for us, to-date, dealflow has not been an issue. We have recently focused on the GP-led market, where we have found lower buy-in multiples, better alignment with GPs and more dealflow given our well-established position in this market, having invested close to 30 percent of the $11 billion in capital invested since inception. This allows us to be selective. We’re willing to say no.
Wouter Moerel is an Amsterdam-based partner and head of AlpInvest’s secondary investment team. He joined the firm in 2005 from Carlyle where he was a principal focusing on telecoms and media sector investments, and has led the secondaries business since 2007.