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How strip sales could insulate GPs from a no-deal Brexit

GPs worried about the UK's fate but who want to leave money on the table should look to secondaries for their backup plan.

The Beach Boys’ timeless hit God Only Knows is an apt point of reference for anyone trying to figure out what’s likely to happen next in the Brexit saga.

On Tuesday British prime minister Theresa May suffered a crushing defeat in the House of Commons after her plan detailing the UK’s withdrawal from the EU was rejected by 230 votes. The opposition has since launched a bid to trigger a general election and with just 70 days to go until the departure date, it’s anyone’s guess how this will play out.

Brexit’s exact effect on the secondaries market has been difficult to measure. In the immediate aftermath of the June 2016 referendum there was anecdotal evidence that some global limited partners were looking to sell stakes in UK real estate funds. Secondaries Investor has not come across any credible data showing a wholesale flight from UK private markets funds.

And yet, Brexit has been linked to some high-profile deals. Take London’s Lyceum Capital Partners, which cited dampened post-Brexit sentiment, among other reasons, as having contributed to it pulling fundraising for its fourth fund in January 2018. Nine months later the firm used a stapled deal to rebrand as Horizon Capital, as Secondaries Investor reported.

We’re now hearing that another brand name UK private equity house has been working with an advisor on a Brexit-driven GP-led deal. The idea was to replace LPs with concerns over Brexit with secondaries capital; as of early January the process appears to have stalled due to a pricing mismatch from buyers worrying about the very same thing.

Is there a silver lining to the uncertainty caused by Brexit? Triago certainly seems to think so – the advisor and placement agent’s founder Antoine Dréan released a set of humorous and outrageous predictions last week that include Coller Capital setting up a “Believe in Britain” fund. The vehicle would acquire $6 billion-worth of strips of assets pre-arranged with five mega-funds who want to reduce their British exposure by between 15-35 percent.

We don’t think this is as outlandish as it may seem: strip sales have been used before to reduce exposure to certain markets, such as Warburg Pincus‘s 2017 deal with Lexington Partners and Goldman Sachs Asset Management involving a slice of Asian assets. We also understand that Dréan’s notion that the capital for the BIB fund would come from “three major European family offices” is not pure fiction.

GPs worried about political uncertainty who want to sell down exposure while keeping money on the table would do well to start making calls to secondaries buyers. With a no-deal Brexit looking increasingly likely, GPs with UK exposure should look to the secondaries market for help with any backup plan.

Are you aware of GPs using the secondaries market to reduce UK exposure? Let us know: adam.l@peimedia.com or @adamtuyenle

PS Speaking of the beach Secondaries Investor will be at the IPEM private equity conference in Cannes next week and will be moderating the panel ‘Innovative Liquidity Transactions’ on Wednesday with Greenhill, Idinvest, Northleaf Capital Partners and TempoCap. Be sure to drop by and say hello.