ICG: From deal-by-deal approach to oversubscribed debut LP-led fund

Intermediate Capital Group was “significantly oversubscribed” for its debut LP-led fund, which closed on $1 billion, Secondaries Investor reported earlier this month. Including co-investment special purpose vehicles and SMAs, the London-headquartered asset manager has received total commitments of $1.6 billion for the strategy.

Ahead of the fundraise, the firm’s LP Secondaries team took a deal-by-deal approach in order to generate a track record for the strategy. ICG and co-investors ultimately purchased $1.5 billion of record date NAV plus unfunded commitments across seven deals prior to the close of the fund.

Secondaries Investor recently sat down with Oliver Gardey, head of private equity fund investments and LP Secondaries at ICG, and Ryan Levitt, head of Americas LP Secondaries, to discuss the firm’s plans for deployment as well as their outlook for the LP-led secondaries market.

How did the fundraise for your debut vehicle go? What was the feedback from limited partners?

Oliver Gardey: We’ve been here before, so we didn’t have the expectation that raising a first-time fund – particularly after covid – in this difficult fundraising environment [was] going to be easy. Therefore we had to be thoughtful, strategic and tactical about it. It was – particularly in the beginning – hard work, but the execution and how we thought about it actually worked out the way we expected.

That was really based on three main things. One is that we had a lot of confidence in our investment strategy – that we [would] be able to identify and do really interesting deals. Number two is that our investment strategy is quite differentiated in the current market environment. But that’s all talk unless you actually have deals in the pipeline, deals executed and [you have] a track record, which, because it’s fairly differentiated and new, we didn’t have directly. Yes, we’ve done similar deals before, but not in a clearly executed, focused way like this.

The third [factor], which made it successful and was part of our strategy, is that the ICG platform gave us the ability and the balance sheet to actually underwrite the deals. Our strategy was: we’ll underwrite a deal and then we’ll syndicate a portion of the deal to interested investors as long as they invest in the fund, so they get free fee and carry co-investment in the deal.

It’s hard work, and it’s a slow start because you have to, deal by deal, build up your fund.  After 18 to 20 months, we were able to do four transactions. That was then tracking really nicely by the summer last year. That was already at a 1.6 net TVPI. On the first deal, [we] returned all the capital back [and] all cost back.

Fund I was at a 31 percent DPI as of the end of the third quarter. That then turned on the switch where suddenly a lot of investors saw [that] the investment strategy is differentiated, they have done these transactions and it’s performing well, and therefore we believe in the strategy.

The fund has completed seven transactions. How many deals do you expect to make?

Ryan Levitt: With those seven deals in, Fund I is approximately 50 percent committed versus the $1 billion dollars of capital [it has to deploy], so we’re right on pace with where we want to be. It’s hard to look into a crystal ball, but we’d suspect that we’d have somewhere around a dozen transactions in the fund. [Some] will be some smaller tuck-in deals where we see single-line items that we know and we really like – where we might be a debt lender to the GP, we might be a primary investor, we might be an existing secondary investor. Then we’ll have small to mid-size portfolios – $100 million-$300 million – where we think there’s less competition. We have a differentiated view on assets [as well as] GP quality and the like.

Are there any particular asset classes or geographies you’ll be focusing on?

OG: [We are] leveraging [areas] where we have the data, the knowledge and the insight. That has to match with the ICG platform, which is only [focused on] buyouts in Europe and the US. That is also where we see much less risk [compared with] emerging markets where liquidity is much more difficult. Venture is a specialised skill on its own.

So therefore we’re very specialised, [focused] only on LP stakes, buyouts, US, Europe. It’s very clean; it’s very clear. That’s what our investors like, because they’re not investing in a black box where they don’t know how much [of the fund will be made up of] GP, LP, how much is [made up of] buyout [or] venture and in [which] country market. We’re very clear and focused on those criteria. Our investors know exactly what they get.

Where do you see the most interesting opportunities in the LP-led market today?

RL: Institutional investors are under pressure. The bounce-back in equity markets [has] helped a portion of the denominator effect, but fixed income markets certainly have not come back. If you couple that with the fact that people are still out fundraising, yet distributions are still relatively slow, capital calls are continuing to a certain extent – private equity investors still need to manage through an overallocation to private equity, so they’re doing so through portfolio sales.

You’re seeing them sell some very good managers because they want to re-up in the new fund. So, contrary to popular belief – or maybe the uninformed belief – oftentimes investors sell some of their best assets because they don’t want to take a bigger discount on the poorer assets. We’re very much focused on buying quality assets at an attractive price. So that dynamic works pretty well for us.

All that being said, it’s not easy. We say no to a lot of dealflow, we lose a lot on bids, and we’re very picky on the type of assets that we want to own. [With] our last three deals that closed in March, we bought single GP interests where we had particular insight and knowledge on the underlying funds, or you had a GP that was highly restrictive and only allowed one or two names to buy it. That being said, the three deals we closed before that were broader portfolio deals, and we’re looking at both as we go into the last three quarters of 2024.

The other thing is there’s been a fair bit of money raised in secondaries. Last year was the second-highest year on record and capital overhang, depending on what estimate you believe from the various banks, is somewhere under 2x, so it doesn’t take much of an increase in secondary supply to drown out the amount of buyer capital that’s available. It’s not to say that our world is not competitive, but if you look over the next three to five years, all indicators would say the secondaries market will continue to grow at double-digit rates, and buyer capital has to grow significantly to keep up with that. All of that means is that we have a pretty high degree of choice.

This is an abridged version of the conversation Secondaries Investor had with ICG’s LP Secondaries team, which has been edited for clarity.