Headway: Deal flow set to slow

Christiaan de Lint, founder of Headway Capital Partners, explains why secondaries deal flow might slow down once banks get to grips with the tough regulatory environment.

Having spun out of Coller Capital in 2004, how is your investment approach the same and/or different and what changes have you seen in the secondaries market since then?

Coller Capital has always been known for doing transactions off the beaten tracks, and their ability to think outside of the box. We’ve certainly kept that idea from Coller as well, but we are focusing on the smaller end of the market, doing complex deals that tend to be below €30 million.

The key change has been a massive commoditisation of the secondary LP market. With everything that goes with it – higher prices for sellers, more competition, more types of buyers – it’s now really become a much more transparent market.

Is the secondaries market reaching a bubble phase?

I would tend to agree with people who think there may be a secondary bubble. For two reasons: first, it is a very expensive market, and a sustainable growth environment is really needed for buyers to make money at current prices. Second, we expect the level of current deal flow to decline in the medium term – the current situation is probably not sustainable.

The argument is there may be less deal flow once the wave of regulation has swept through financial institutions and once large investors have cleaned up their portfolios. Without a new source of large portfolios, there is a risk that deal flow might suddenly encounter a drastic decline.

That said, I am certain that secondaries firms will not stop raising money before that happens, so eventually, together with all the money available from opportunistic buyers, you’ll have a lot of money on the buy side potentially chasing fewer deals.

Has the use of leverage in secondaries transactions increased?

Yes, because banks are back and are lending, and there are more institutions wanting to lend against secondary transactions. Additionally, returns are pushed lower in such a competitive secondaries market, so buyers are looking at various ways to improve returns and leverage is one of them.

Leverage could come in either the form of pure third-party leverage or implied leverage such as deferred payments, which are also being used more often today. And we’re seeing more requests for offers on a deferred payment basis with people saying: “How much would you offer if you had to pay half now or half in one or two years?”

What are you seeing in terms of the popularity of GP restructurings?

GP restructurings are the new buzzword of secondaries, but it’s a little bit overblown in my mind. It’s certainly a real phenomenon and it is happening more. Even so, in some cases, more existing investors have actually rolled over in GP restructurings than expected, leaving fewer investments open for secondary buyers.

You could, for example, have a successful restructuring, but if 90 percent of the LPs roll over, it becomes a very small secondaries transaction. That is part of the reason why I don’t think the market is going to be as big as anticipated by some. In addition, these transactions are complex, and you need many factors and different parties to be aligned for a restructuring to happen, and that doesn’t happen that often.

Moreover, you might also question prices at which recent restructurings have happened; you are dealing with assets that haven’t been sold with a GP that hasn’t delivered as expected. Are the discounts high enough to reflect the situation? I don’t think the restructuring market will grow to the extent that it is being publicised.