Montana Capital Partners raised €800 million for its latest niche secondaries fund in April, double the amount raised for its predecessor. Partners and co-founders Marco Wulff and Christian Diller discuss the fundraising process and the impact that a downturn could have on the complex end of secondaries market.
Your recent fund was twice the size of its predecessor. Did this have an impact on the fundraising process?
CD: It was not very different. We have a fairly limited number of limited partners. We also didn’t approach many new investors because we knew that almost all of our existing investors would come in and for larger commitments. In total we have 25 LPs in the new fund. From an investment perspective it is also not so different because we extended the investment period from three to four years, so we have a little longer to invest. With our €400 million Fund III, the rate of deployment was around €140 million per year (€170 million taking co-investments into account). Now we intend to invest around €200 million per year for this fourth fund.
What were you looking for in the small number of new investors you approached?
CD: Our idea here was to have a more geographically diversified investor base. While our Fund III was only with European investors, the idea was to broaden the investor base. We were able to win sovereign wealth funds from Asia and the Middle East, and insurance companies and pension funds in the US.
Do you expect complex transactions to drive dealflow with this fund?
MW: We like it when it’s a little bit more complex and we can apply our structuring skills. This can range from payment schemes, to earn-outs and fully structured transactions. They now form a significant part of the environment and we believe that as long as the market is as it is today, we are going to see additional attractive opportunities. The question remains whether there will be sufficient GP-led transactions, where we have been very selective, in a downturn market, which may happen over the next few years.
Are you on the pessimistic side of GP-led transactions?
MW: Honestly, we don’t know, because during the last crisis GP-led transactions didn’t exist. Our idea really is to have different pillars of potential deal flow. That could be speaking to LPs directly, speaking to intermediaries, developing solutions with GPs – we are going to try to be active on all these different sourcing channels.
I think there are two factors that could lead to a decrease in a downturn. One is that in every downturn the underlying portfolios get affected. And the second could be pricing. During the last crisis discounts were very significant and then it’s obviously less attractive for the current owners of those stakes to sell.
Do you think the automatic response of LPs to a downturn might be to sit tight? What happened in the last crisis?
MW: We were quite active in the last crisis. I would say there are two groups: there is the group that doesn’t do anything and sits on its hands, and there’s the other group, which has their hair on fire and needs to find a solution over the short term. They are prepared to sell at lower prices.
Back then the denominator effect was significant. Public stock valuations went down fairly quickly but private equity valuations stayed high because of the time lag, and so they [investors] were overexposed to the asset class and had to adjust.
Prices are relatively high in today’s market. That gap when it comes to price expectations will be amplified during the next downturn. Then you have to find smart solutions and customise your solutions to meet the seller’s requirements, do a little bit more work on the structuring side. People will become more creative again.