In June 2020, Secondaries Investor reported that Intermediate Capital Group was planning to launch a fund dedicated to LP portfolio deals, just as most of its counterparts were moving in the direction of the GP-led market.
The team is led by Oliver Gardey, who was head of Europe at Pomona Capital before moving to ICG in July 2019 to lead its listed vehicle. He was followed in November that year by Ryan Levitt, a New York-based former partner with Pomona. Unigestion’s Vivien Blossier joined as head of European secondaries investments a month after.
The fund is in market with an unknown target, according to a filing with the Securities and Exchange Commission.
Gardey and Levitt spoke to Secondaries Investor about ICG’s decision to raise a dedicated LP stakes fund and the state of the LP market today.
Why has ICG decided to raise an LP stakes fund?
Oliver Gardey: The LP secondaries market has grown twice over in the last 10 years. The GP-led market has made a massive additional impact, then you have preferred equity deals and NAV financings… I call this Secondary 3.0. Once it becomes a mature market with lots of different types of deal, it’s important that you start specialising in the underlying transactions.
It’s not just specialisation in the underwriting that matters, but also for an investor, [choosing where to invest matters]. If you’re investing in a commingled fund with all kinds of deal types, it’s a black box and you can’t really understand what your exposure is and what kind of a risk profile you end up with. It’s easier for the limited partner to allocate to the kind of secondaries they want or the mix they want when they have clear specialisations and profiles.
Ryan Levitt: [You used to] invest in secondaries to get private equity returns with better liquidity, lower risk and more visibility. If you invest in a generic secondary fund today, you might get some of those things but you’re not sure of the risk that you’re taking because of single-asset concentration and you’re not sure what liquidity looks like because GP processes are much lumpier. If you do a fabulous job underwriting single assets, you can generate a very nice IRR. But not everyone’s going to do a fabulous job.
What type of funds are you targeting? Do you have specific parameters?
Gardey: We are focused on quality funds, mainly buyout in Europe and the US. Our goal is to achieve private equity-type returns with much lower risk and higher liquidity. How do you achieve that? By taking risk out. We have a saying that you can get A returns from A managers, you can get A returns from B managers if you price it right, but it’s difficult to get A returns from C and D managers no matter how you price it. We want to invest with sponsors that tend to under-promise and over-deliver. The further you go down the quartiles, you tend to have the opposite outcome.
With inflation fears, rate rises and the war in Ukraine, some are sitting out of the LP portfolio market until the next quarterly marks come through. How are you approaching the market?
Volatility can create opportunities for us. It can also create challenges in underwriting. That’s where I think being focused and having the right team in place to do portfolio underwriting is the best way – very different than if a team is split between GP-led and LP-led. I also think you have to be selective. Year to date we’ve seen $30-plus-billion of dealflow, which is bigger by far than the entire market when I started in this business in 2004. We’ll do 1 to 2 percent of that dealflow at most.
Are you seeing a gap between the pricing expectations of buyers and sellers?
Levitt: For the time being, the bid-ask spread has widened. It just needs bridging. Structured solutions are one tool. A lot of times we start off with a more structured discussion but we might end up doing a cash bid. At the end of the day, the LP finds that much easier and wants to move on. But that’s the part of the dialogue you can have as an LP secondary specialist, to really think through all the different opportunities and the tools we have in the toolbox.
Is it often a question of convincing LPs that it’s okay to sell at an optical discount?
Gardey: A large optical discount is always hard. It’s emotionally difficult for anyone to stomach. It takes a very sophisticated seller to really remove themselves from the discount discussion and look at it entirely from an economic perspective. How much cash do I get today or in future and how can I reinvest that capital? These discount discussions can change quickly depending on the quarter. When you are in a flat or down environment, the discounts can widen quickly. But as soon as NAVs flatten out or you have an uptick in the NAV, very quickly that discussion changes to the positive.
What is likely to be the main driver of LP portfolio deals over 2022?
There has been a traffic jam with regard to private equity funds raising capital. You combine that with a market that is probably less liquid because GPs are going to delay their sales and wait for a better market environment to exit. So realisations are going to be flat or down to last year and you have an enormous amount of re-ups coming through. Every PE investor is reviewing their portfolio to better understand how they should create realisations and liquidity.
On top of that, there is a denominator effect when LPs’ public holdings come down and there’s a delay in the private holdings coming down. They may have to rebalance away from private investments in order to stock up their public portfolios, which again would be good for secondaries.
Oliver Gardey is head of private equity funds at ICG and Ryan Levitt is a managing director. They are based in London and New York, respectively.