Why Glendower will be a big name in secondaries

The former captive unit of Deutsche Bank is no longer the parent company’s ‘neglected child’.

The name ‘Glendower’ may be new to those in the secondaries market, but the team behind Glendower Capital, freshly spun out of Deutsche Bank, is anything but.

Its partners, Carlo Pirzio-Biroli, Charles Smith, Adam Graev, Chi Cheung and Deirdre Davies, got their start 15 years ago as secondaries sellers.

Deutsche Bank had about €6 billion of private equity assets on balance sheet and Smith, who came from the M&A side of the bank, ran a process to spin out 130 direct investments worth €1.5 billion. With Cheung, who had also been in M&A, Smith moved to the corporate investment side of Deutsche Bank. They teamed up with Pirzio-Biroli and Davies and sold the remaining €4.5 billion, a process that was completed in 2005.

When all was said and done, they had sold 600 assets in 150 transactions (everything from fund auctions to GP-led restructurings, spin-outs and a large securitisation) with no intermediaries.

“We were the largest sellers in the secondaries market for almost four years,” Pirzio-Biroli says. “We sold assets to 90 buyers on a repeat basis so we got to know almost all secondaries shops and we thought ‘it’s a very inefficient market and there’s room for one more institutional player’. We pitched the bank to let us set up a secondaries business.”

In 2007, the group raised its first fund, closing $775 million for DB Secondary Opportunities Fund I, with capital from investors including Deutsche Bank, Coller Capital, Lehman Brothers and LGT Capital Partners. The second fund closed in 2012 on $614 million and its third vehicle closed in 2014 on $1.65 billion.

Over the years, the team has made a speciality of focusing on mid-market deals, splitting its transactions roughly 50-50 between fund stakes and GP-led transactions. It typically buys assets that are funded at a high percentage and has, on average, purchased assets at a 25 percent discount. Over the life of the team, it has completed about 90 transactions averaging $35 million in size.

Its global strategy – the team has offices in London and New York – has paid off. Across its three funds, with different sizes and vintages, invested in different market cycles, the secondaries unit delivered attractive similar return profiles, according to an investor, with an aggregate net internal rate of return of about 20 percent and a net 1.7x multiple.

But the journey, although ultimately successful, was also chaotic and while the bank was not interfering with its investment strategy, the secondaries unit was bounced around for many years as a ‘neglected child’, a person familiar with the history of the team says.

The team changed reporting lines within the bank more than 10 times. It was, at one point, merged with a primary fund of funds and a direct investment shop within Deutsche Bank. The entire asset management division was almost sold to Guggenheim Partners in 2012, which affected the fundraising process for its second fund.

The final straw came a little bit more than six months ago when Deutsche Bank decided to cancel bonuses as it suffered under a hefty litigation bill with the US over toxic mortgage securities.

“The very difficult compensation cycle may have tipped the event,” the person says of the spin-off.

Deutsche Bank declined to comment for this story. Glendower Capital declined to comment on the circumstances of the spin-out.

With a fresh start and a name ready for battle (Glendower was the Welsh warrior immortalised in Shakespeare’s Henry IV), the firm is expected to begin pre-marketing the Glendower Secondary Opportunities Fund IV in the autumn, seeking between $1.5 billion and $2 billion, a source familiar with the matter says. Glendower Capital declined to comment on the fundraising.

If that fundraising goes well and if the firm remains disciplined by sticking to its proven investment strategy, the name Glendower will become a fixture.

What sorts of challenges do newly formed spin-outs face? Email us: marine.c@peimedia.com