Banner Ridge’s Cusano: fundraise was less about strategy and more about results

Banner Ridge Partners held a $2.15 billion final close on its latest flagship secondaries fund this month, significantly surpassing its $1 billion predecessor which closed three years prior.

Banner Ridge Secondary Fund V had completed 23 transactions representing 15 percent of the fund as of 31 December, managing partner Tony Cusano said, adding he anticipates the fund will end up backing more transactions than its prior fund as well as some larger deals. Secondaries Investor spoke with Cusano about the fundraise as well as his outlook for activity in the distressed, special situations and credit secondaries space.

How many new investors did you see in Banner Ridge Secondary Fund V?

This fund had 37 new, what we call substantial investors, ie they’re bigger than $5 million. We raised $1 billion for our Fund IV, and those same investors came back for $1.55 billion in Fund V… the rest of the capital was raised from new groups.

The reality is you could say that [we around doubled] every one of our funds. Every one of our funds has doubled and we’ve kept our returns very consistent over time.

The one nice thing about getting bigger here is it allows you to find new investors that you couldn’t get before… very large-type groups that don’t want to invest with groups that are sub-$2 billion funds. On the other side of that, it gives you the opportunity to become a solution provider in deals. With a smaller fund, you have a cap on what you can do size-wise, which is typically below what large sellers want so you’re trying to stitch together a deal with partners. Now we can just speak for scale transactions.

You managed to raise a substantially larger fund compared with your predecessor in a difficult fundraising environment. What resonated with LPs about Banner Ridge’s strategy?

I think it’s less about the strategy and it’s more about the results. The reality is you can be in whatever strategy you want in the world in alternatives and even if that strategy is really hot at the current moment you’re out fundraising, you’re still competing against other people…what’s different is the 14-year track record of compounding, really high returns.

[Secondaries Investor: Banner Ridge Secondary Fund III had an IRR of 38.65 percent and a total value to paid-in capital of 1.81x as of Q1 2023 while Banner Ridge Secondary Fund IV had an IRR of 72.22 percent and TVPI of 1.72x as of Q1 2023, according to Montgomery County Employees’ Retirement System data.]

What is Fund V looking for in the transactions it will seek to back?

We’re really trying to back high-quality GPs that have demonstrated an ability to succeed with both their winner deals, but also their troubled investments. That’s what separates GPs.

On the seller side, we’re looking to transact at a fair value with sellers that value our reputation for being easy to work with [as well as those that are looking for] the certainty of closing. There are a lot of sellers out there that are more interested in just maximising price through an auction. That’s fine. We don’t end up winning a lot of those. We end up being a better partner in situations where price is important, but maybe not the most important thing, and maybe the most important thing is execution, certain closing speeds, because those things we can get right every time.

What will the fund target when it comes to LP-led and GP-led split?

We have a lot of flexibility in our funds to really do whatever we see best relative value [in], so if the LP deals are better relative value than GP deals we’re doing LP deals and vice versa. The bar is really high [for GP-leds] because [with] a lot of LP deals we’re in, there’s really good absolute value. Historically, our funds tend to be around 80 percent LP-led, and then… some small amount of co-investments and GP-led.

What’s the outlook for opportunities in the distressed, special situations and credit secondaries space?

There’s two parts to the macro question. There is ‘what’s the distressed, special situation and the credit opportunity on the direct side?’, and then secondaries is a derivative of that four-to-six years later.

Really what we’re seeing now is a lot of the deals from covid… are hitting their fourth year, and that usually is when you start to see secondaries starting – four to six years is that sweet spot. For the investment period in this fund, you’re going to see a lot of the funds that were raised during covid doing distressed special situations and opportunistic credit.

Then there’s always the tail of funds from the previous 10 years. You’re looking at 2014 [through to] 2018, there’s a lot of NAV still available in funds that are pretty long in the tooth. The thing about those funds is when LPs are evaluating them to sell, they know how they’ve done. When you’re seven, eight, nine years into your fund life, it’s really hard to change your IRR. There is a healthy supply of opportunities for us from that 2015 to 2018 era.

Tony Cusano is the co-founder and managing partner of Banner Ridge. Prior to Banner Ridge, Cusano spent nine years at Siguler Guff & Co., where he was a managing director and sole portfolio manager of the firm’s Secondary Opportunity Fund.