Breaking with tradition

GP-led restructurings once sat comfortably in the ‘non-traditional secondaries’ bucket, but the definition is evolving as buyers search for higher returns through even more complex deals.

GP-led restructurings once sat comfortably in the ‘non-traditional secondaries’ bucket, but the definition is evolving as buyers search for higher returns through even more complex deals.

You might have missed it but, over the summer, KKR announced it had moved around $400 million of assets – private equity and alternative credit co-investments, growth equity investments, CLO equity – off its balance sheet into separately managed accounts.

It turns out the SMAs were backed by secondaries buyers, according to KKR’s chief financial officer Bill Janetschek, who revealed a few tantalising details at an industry conference in New York in September.

In one of the deals, the secondaries buyer also committed primary capital to a fund KKR is raising – think stapled deal with no transfer of LP stakes, with sprinklings of a spin-out where the managers don’t actually spin out.

Non-traditional secondaries deals such as these have been on the rise, as high levels of dry powder push secondaries firms to come up with more creative ways to deploy capital, as well as seek higher returns than those gained from traditional LP interest deals or even GP-led restructurings.

Deals such as HarbourVest Partners’ hostile takeover bid for SVG Capital, or Coller Capital teaming up with CVC Capital Partners to acquire direct lender Northport Capital in August, are prime examples. Couple that with public market volatility and high levels of political uncertainty and it’s no wonder secondaries dealmakers have been keen to get creative juices flowing.

“You have buyers looking to get that diversification, looking to get that alpha in their returns, so they’re looking at these GP restructurings, they’re looking at team spin-outs, they’re looking at secondary directs, they’re looking at balance sheet light transactions,” Adam Howarth, co-head of private equity secondaries at Partners Group, told me.

Secondaries firms helping institutional investors move assets off their balance sheets is nothing new – deals with banks and pension funds work much the same way. But in the KKR deal, which closed in the second quarter, the New York-headquartered buyout giant will manage the SMAs and – according to Janetschek – retain more than the typical 20 percent share of the upside; something unlikely to happen in your standard deal with a bank.

“Having the seller still involved with the assets is probably the biggest change,” Howarth said. “The market is deeper and wider than it has ever been, people are thinking more creatively about how to use it, buyers are thinking more creatively about how to find content for their clients, and that’s creating these new opportunities.”

Of course, not all secondaries buyers have the ability to do deals like the one with KKR. Thomas Liaudet, partner at advisory firm Campbell Lutyens, told me their complexity makes them more similar to direct secondaries than buying LP fund portfolios, and as such requires a certain level of sophistication and resources in order to analyse, structure and close such deals.

KKR hasn’t disclosed who the buyers were in its two deals, but chances are secondaries buyers will be hungry for more such transactions; expect increased iterations and further evolution.

“There’s no cookie cutter for secondaries, and even less of a template for non-traditional secondaries – hence the name,” said Howarth.

Stay tuned.

What’s the most non-traditional secondaries deal you’ve come across? Let me know your view: