Mill Reef Capital this month almost doubled its fund size with the final close of its sophomore vehicle.
The Zurich-headquartered firm held the final close for Mill Reef Capital Fund II, which collected €350 million and hit its hard-cap. Predecessor Fund I raised €180 million in 2021, according to Secondaries Investor data.
Founding partner Nico Taverna spoke to Secondaries Investor about the opportunities in the smaller end of the market.
What kind of questions did you have from LPs about being able to deploy into complex secondaries in this kind of environment?
It was quite a challenging fundraising environment with a lot of investors being slightly overallocated to private equity. It was really helpful to have a very clear positioning in the market and we really think we have a USP by focusing exclusively on smaller GP-led transactions.
We’re really a boutique: we’re independent, partner and employee owned. What we always point out is that we are highly aligned with our investors through the setup. That we have through our ownership structure, but also through our GP commitments.
Were investors worried that you would have enough deals to invest in?
It’s a question you always get – whether there is enough dealflow for any particular focus or strategy in private equity. We see ourselves as a liquidity and solution provider to all the smaller fund managers out there. In our universe alone there are at least 2,000 smaller fund managers that we can approach for some form of liquidity solution. I think investors realise that this is a very big universe. You don’t need to be global.
Even by focusing on Europe only, there’s so many smaller fund managers out there that are not typically approached, [that] we think are underserved for GP-led non-traditional liquidity solutions. We see an increasing adoption of these more innovative liquidity solutions by the smaller managers. We still see quite limited competition in this part of the market. A lot of the transactions, small transactions, are in fact too small for the large secondaries funds. In the end, what this means is you have bigger universe, and I think you have quite limited competition. What it leads to is quite an attractive risk/return profile. You can still generate alpha in this part of the market.
What kind of target returns do you seek?
It very much depends on the risk return profile of the transaction. There’s no general target return that we seek. If [it’s] a deal that’s really more downside protected, then obviously go for slightly lower returns if it’s more concentrated. If it’s a smaller company, you’re underwriting [to] a higher return. We get this question quite a lot, but it’s not an easy one to answer. IRR-wise, [we’re] in the 25 percent plus territory.
The fund is almost twice the size of Fund I. Do you plan to back twice the number of deals or are you looking to take a step up in terms of ticket sizes?
I think we’ll probably do few more deals. We’ll stick to the same type of transactions.
When you talk about GP leads and complex deals, is the best way to think about it mainly continuation funds?
We really try to build a very diversified portfolio of different GP-led token transactions with different risk return profiles. We will do single and multi-asset continuation vehicles, but at the same time we would also provide [preferred] equity to portfolio companies and into funds. We do tender offers, we do annex funds, top-up funds, strip sales. There’s a lot of innovation going on in this part of the market. Continuation vehicles are very prominent, but [there are] lots of other kinds of things you can do.
Do you make primary investments from your main fund?
We can. We’re really building long-term relationships with fund managers. Our focus really is secondaries, but with the right partners, we try to build long term relationships. That can obviously involve a primary [commitment], but the majority will go into secondaries.
What kinds of interesting trends or main reasons are you seeing as drivers dealflow?
There are structural growth drivers that have been around for a few years. We’re now in a very particular market environment. There’s also a bit of a cyclical element to it, which fuels the dealflow. Structurally, I think it’s quite clear that fund managers have become really more sophisticated and more dedicated to use these type of solutions for active portfolio management. A lot of the smaller fund managers, they have been quite underserved for a while.
The exit market has been challenging. At the same time, the fundraising market has also been quite challenging. The solution that we and other secondaries providers bring to these managers really helps them to manage their portfolios, generate some liquidity and capital back to their investors. They don’t need to sell their best assets in a difficult market where they would maybe not get the best market price.
In the lower part of the market, you have fewer huge LPs with huge commitments. When it comes to doing GP-leds, does that make things a little bit more complicated when you’re trying to herd all the LPs together on a process?
There is no CalPERS, typically, in the €200 million-€300 million funds. That’s typically the fund sizes that we look at. You have very sophisticated endowments, funds of funds, pension funds. The transaction logic, the process you have to follow, that’s the same. Generally, there’s a much bigger universe to pick from with fewer buyers. It’s a very exciting market with a lot of positive fundamentals and trends. It’s a great place to be.
Nico Taverna is founding partner at Mill Reef Capital. Prior to founding he firm he was head of private equity secondary investments at Schroder Adveq. He holds an M.A. and a Ph.D. from the University of St. Gallen, Switzerland.