The past 12 months were defined by big portfolio sales, single-asset transactions and Asia exceeding all expectations. Here are a few predictions for the Americas and Europe in 2019.
Strip sales for LPs, as well
The Warburg Pincus deal in 2017 showed how a strip sale can help a GP de-risk its portfolio. According to Ted Cardos, a partner at Kirkland & Ellis, the macroeconomic picture means 2019 could be the year LPs go the same route. By selling off part of their newer fund investments, including considerable unfunded portions, LPs can cushion the impact of a likely downturn.
“This is a way for the larger institutional investors to hedge their position, but not completely walk away from managers they like and have confidence in,” he said. “It allows them to de-risk their portfolio and have some cash to weather the storm.”
Downside protection through structuring
On a similar theme, Shawn Schestag, managing director and head of secondaries advisory at Sixpoint Partners, believes there will be greater interest in structured transactions as secondaries investors seek to manage downside protection in the event of an economic downturn. This could involve preferred equity or adjustments in cashflow preferences.
“[Buyers] are still equity investors, they still want equity upside and want to participate in value creation, but many are willing to moderate that upside by doing deals with a lower risk profile,” Schestag said.
Single-asset deals to grow in size
These transactions were a theme of 2018 and will remain so in 2019. Yaron Zafir, head of secondaries at advisor Rede Partners, sees a particular opportunity for GPs that want to consolidate their position in an asset that has multiple shareholders and could use a special purpose vehicle to buy up the minority stakes. The combination of dry powder and an attractive opportunity set, particularly in Europe, suggests an increase in deal size next year.
“I think we will be seeing more transactions over $1 billion in value, potentially even single asset transactions. If you look at the amount of capital being raised for secondaries, they [the larger funds] might not look to do more deals, but will just do larger ones.”
Growth in co-investment stake sales
An influx of capital into co-investment funds and direct co-investments over the last four to five years could mean dealflow for secondaries – if buyers can get comfortable with the assets. According to Verdun Perry, co-head of Strategic Partners, more co-investment stakes are likely to appear on the secondaries market next year.
“At some point some of those co-investment participants may want liquidity in advance of the natural disposition by the GP that made that investment,” Perry said. The right opportunity can be attractive but such deals typically lack diversification, compared with an LP fund interest. Buyers need to be selective, Perry added.
An end to the GP-led party?
Not all are so positive about the secondaries market. Katja Salovaara, senior portfolio manager at Ilmarinen Mutual Pension Insurance Company, believes the rationale for doing GP-led deals is often weak, a reality that is becoming increasingly apparent. Next year will be an inflection point, she believes, and not a favourable one.
“This year has been a Wild West year for GP-leds and they’re probably going to fade away next year,” she said. “Intermediaries are trying to drum up interest but in many cases they’re trying to solve a problem that doesn’t exist – there’s never been more dry powder for secondaries and LPs can sell their stakes when they wish to. As an investor you don’t want to reward someone for failure and some of these situations need to be managed with the current economics.”