This week we published the fruits of a five-month investigation into Whitehorse Liquidity Partners, one of the most talked-about firms in the secondaries market.
If you haven’t read our report, you can find it here. The preferred equity specialist burst onto the scene in 2015 when Yann Robard, who set up Canada Pension Plan Investment Board‘s secondaries business in the early 2000s, left the pension giant to launch his own shop. In the four-and-a-half years since, the firm has raised $3.4 billion across three vehicles and is understood to be fundraising two separate funds as of mid-March.
Our report looks into Whitehorse’s evolution, including founder Robard, who has been described as “charismatic” and a “genius”, and the firm’s strategy of acquiring private equity portfolios and syndicating the equity – something some market participants have called into question.
It also examines the ins and outs of preferred equity – a strategy that could well prove a white knight for private equity portfolio holders in an economic downturn. Why? Because while buyout funds (and by extension secondaries funds) are losing sleep over the value of their assets at a time when the S&P 500 is down 30 percent on its 19 February peak, pref funds simply take longer to achieve their return.
This statement is of course highly simplified, and preferred equity funds that have exposure to sectors disproportionately hit by the covid-19 crisis will take a hit – even though they have preferential rights to cashflows. But the downside protection preferred equity awards means pref fund managers and their LPs are likely losing less sleep than others.
17Capital – the firm that pioneered dedicated preferred equity funds – says it’s seeing similar deal opportunities to those just after the previous global financial crisis when it was investing its debut fund. “One of the deals [we’re looking at] is so identical we could even use the same legals [documents] to one of the first transactions we did,” Pierre-Antoine de Selancy, founder and managing partner at the firm, tells Secondaries Investor. “We’re seeing the same types of situations.”
Those situations being: anyone who wants liquidity but who doesn’t want to sell; LPs who need to fund their capital calls; GPs who want cash to buy but who don’t have the dry powder, among others.
De Selancy is quick to make the point that his firm saw $10 billion in dealflow last year; in the last two weeks alone he has seen more than $2.5 billion.
In uncertain market conditions where sellers want liquidity but don’t want to lose out on upside down the line, preferred equity fills that gap. When the covid-19 dust settles and secondaries buyers and sellers are able to agree on pricing, it’s likely to be a different picture.