Congratulations on the close of your two recent secondaries vehicles. What was the fundraising process like? Could you share some of the most interesting questions LPs asked about your strategy and the secondaries market during the fundraising process?
We are very pleased to have closed both funds at their hard-caps, but clearly we had not anticipated having to adjust our fundraising process to the unique circumstances of 2020. It was really a story of two different fundraising environments. The first lasted until March 2020, and included the usual face-to-face meetings with our existing investors and selectively new investors. The second started after March 2020 with virtual meetings and due diligence sessions, in a market that pushed investors with dry powder to actually increase their allocations to secondaries.
Many investors had questions about how we would find attractive opportunities and transact during a period of high uncertainty, and about the time it would take for the secondaries market to rebound following the March 2020 lows. More than a year later, we can demonstrate that our very targeted strategy enables us to be even more active during periods of uncertainty. This was similar to what we achieved during the global financial crisis, with our vintage 2009 secondaries programme.
Both Crown Global Secondaries V and Crown Secondaries Special Opportunities II are already more than 35 percent committed to transactions, with the vast majority sourced and secured during the second half of 2020. By Q2 2021, the secondary market has pretty much fully recovered in terms of total volume. Currently the market is very competitive and requires greater selectivity than ever.
Do you have separate teams within LGT Capital Partners working on the two different funds?
We rely on our full private equity team of more than 100 investment professionals to source, diligence assets and cover managers globally. However, we designate a transaction team for each opportunity, with investment professionals coming from our dedicated secondaries and co-investment practices. For complex GP-led transactions, for example, we leverage our in-house experience and expertise, which includes team members with in-depth knowledge of the relevant geographies and industry sectors of the key underlying assets.
LGT Capital Partners is known for backing spin-outs. What is that market like at the moment? Have you seen an increase in teams spinning out?
Yes, we have built a strong track record of backing spin-outs, and we continue to see attractive opportunities. This is especially true among experienced investment teams that can no longer count on their historical backers, who have had their core businesses disrupted by the pandemic. These historical backers have had to allocate more capital to support their core business, which enables LGT CP to support the private equity programme. In many cases, the private equity underlying businesses have not been impacted by the crisis – and in certain sectors, assets have even outperformed expectations. We found many opportunities to provide additional capital to help accelerate this growth.
The CSSO II vehicle focuses on concentrated and single-asset deals. What is the typical bite-size of this fund and how many deals do you plan to back?
CSSO II has typically invested $40 million to $100 million per transaction, building a more concentrated portfolio than CGS. However, LGT CP can underwrite up to $250 million per asset, as we also invest from certain mandates where our investors have an appetite for syndicated co-investment opportunities.
The CGS V fund focuses on LP portfolios. Has this market returned to pre-pandemic levels? What is competition like for portfolios now, given that many buyers have turned their attention to the GP-led market?
For CGS V, we are building a diversified portfolio of LP stakes, but we will also continue to do complex GP-led transactions, in line with the track record we have established over two decades. The volume of LP stakes has indeed increased substantially since 2020, but it has not yet reached pre-coronavirus levels. We continue to see many sales processes where the portfolio is sold piecemeal, enabling us to cherry pick the most attractive assets.
What are your biggest concerns when it comes to deploying these two funds?
As we have already committed more than 35 percent of both funds we are not worried about deployment, but we remain concerned about high valuations and situations where the secondary market should not be the best exit route for underlying asset. Dealflow is plentiful, and we expect that to continue. In any case, we will remain cautious and very selective.
Ivan Vercoutère is a co-founder of LGT Capital Partners and a managing partner and a member of the executive management team. Martha Heitmann is a partner on the secondaries team at LGT CP in Pfaeffikon. Sascha Gruber is a partner and co-head of secondaries at LGT Capital Partners (USA), overseeing the firm‘s secondaries investment activities in North America. André Aubert is a partner and co-head of secondaries at LGT CP based in Switzerland.