AlpInvest’s view on leverage

The leader of AlpInvest’s fund investment team has argued using leverage when bidding on large portfolios changes the nature of a secondaries investment.

Speaking at PEI’s recent Global Investor Forum in Tokyo, Maarten Vervoort said, “The irony of using leverage to acquire these portfolios is the fact that all the early cashflow is used to pay down the debt.

“There’s no mitigation of the J-curve. Not all investors really appreciate that all of a sudden, it becomes a completely different kind of instrument and a different type of investment.”

In its Second Half 2015 newsletter, London-based advisory firm Elm Capital noted there were a growing number of aggressive buyers who have access to cheap leverage, and this was forcing those who cannot compete on portfolios to focus on single fund interests or on GP-led restructurings.

Such financial engineering, most often in the form of leverage as well as deferred payment do little to create value, according to market participants.

Levels of leverage at the deal level can be as high as 70 percent, Vervoort said, noting that the nature of investments changed further still if the underlying portfolio is already leveraged.

“If you put 70 percent of leverage under a leveraged portfolio, it’s leverage on leverage,” he said. “It becomes a totally different type of investment, and you can argue to what extent it becomes an attractive investment.”