Mosaics in the era of stratification

LP-led mosaic transactions, in which portions of a portfolio are sold to separate buyers, have been a common feature in a market where secondaries buyers are risk-off and investors are keen to sell to address the denominator effects on their portfolios – just not at any price.

In 2022, the average number of buyers in LP portfolios that had a mosaic profile rose to 3.5 from 2.4 the year previously, according to data from Jefferies. This also resulted in smaller bids, with lead buyers taking on 64 percent of net asset value purchased, compared with those buyers taking over 71 percent the prior year.

Just this week, affiliate title Buyouts reported on Kaiser Permanente’s whopping $6 billion portfolio sale, which is mostly completed with a slight discount to NAV. That offering is being taken up by a group of buyers in a mosaic transaction.

It follows the closing in the UK of Tesco Pension Fund’s portfolio sale of approximately £1 billion ($1.25 billion; €1.13 billion), which six buyers acquired at a discount, Buyouts reported. The portfolio was a mix of buyout, private credit and infrastructure funds, which helped drive multiple buyers to the process, sources said.

“There’s no deal for myself, for a competitor, that’s going to winner takes all that’s been over $200 million in size,” an adviser told Secondaries Investor. “We haven’t heard lately – and are unlikely to hear it any time soon – this whole business of Ardian or HarbourVest comes in and buys the whole portfolio.”

Although mosaic transactions can be less efficient overall compared with transactions where a smaller buyer universe picks up a portfolio, these transactions can produce better outcomes for a seller, a buyer tells Secondaries Investor. Yes, they are complex and detailed, but as the market continues to grow and differentiate, they could become more commonplace as markets rebalance.

In comparison with previous times of economic volatility, many LPs today have heavily diversified private markets portfolios across various asset classes.

Managers are beginning to specialise themselves too – Secondaries Investor highlighted that buyers like Blackstone Strategic Partners, Coller Capital, AlpInvest Partners and LGT Capital Partners have all carved out separate strategies from their main funds and have launched specialised vehicles over the past year.

Having separate vehicles means those funds may be able to be more bearish on price, given they have a more appropriate cost of capital for the asset class they’re targeting within the portfolio.

Because of the stratification in the market over the past few years, mosaic transactions do bring differentiated pricing, and if LPs believe they’re getting more money by doing these transactions, then that’s what they’re going to go with, the adviser says.

There will inevitably be some LPs that come to market with portfolios dedicated to specific asset classes due to internal dynamics and timing considerations. Where LPs bring large, cross asset class portfolios to market, expect mosaic transactions to become a fixture in future.

Write to the author: madeleine.f@pei.group