Northleaf Capital Partners held the final close on its sophomore secondaries fund on $800m in September as well as $500m in SMAs. Managing director Michael Flood discusses how the firm plans to deploy the fund through deals including preferred equity and fund level financings.
The fund is more than three times larger than NSP I. Could you talk us through the rationale behind this?
Similar to all of our investment programs at Northleaf, we are laser focused on targeting the appropriate capital raise that will match the investment team’s capacity with our dealflow and the market opportunity during the fund’s investment period. Over the last number of years, a couple things have happened: we’ve seen supply grow as the market innovates with increased GP-led transactions, fund level financings and direct secondaries, and in order to address this growing opportunity we have built the secondary team’s capacity and capabilities by expanding our London office and opening an office in New York, ahead of raising capital.
Our strategy will remain the same, with a focus on all types of mid-market secondary transactions. With increasing supply and a multi-office team, we’re confident that we will be able to continue to generate the kind of outperformance from our secondaries program that we have produced historically.
What was the fund’s target?
Our original target was $600 million for NSP II and $1 billion in total secondary capital, including capital from discretionary custom accounts that invest alongside the fund. In total, we raised $1.3 billion of secondary capital.
What types of transactions will you target with the fund?
As the secondary market has continued to evolve, we have focused on building a one-stop shop for mid-market secondary transactions with the capacity, capability and flexibility to source and execute on all types of transactions globally. We expect that our fund will include the best opportunities sourced in the secondary market over the next couple of years. As a rough guide, we have told investors to expect approximately 50 percent of the portfolio to include LP interests and portfolios, leveraging the access and informational advantages from our robust primary investment platform. The other 50 percent of the portfolio will comprise more complex transactions such as GP-led restructurings and tender offers, fund level financings and direct secondaries sourced by leveraging both our primary investment program and the broader Northleaf investment platform, including direct investment capabilities across private equity, private credit and infrastructure.
What is Northleaf’s definition of mid-market secondaries?
Mid-market for us means a focus on transaction sizes of less than $100 million – it also means mid-sized companies. A significant portion of our track record is made up of portfolios and direct interests in mid-market companies with between $10 million and $100 million of EBITDA. We are particularly well-positioned to identify value in this part of the market by leveraging the access and informational advantages of our primary investment program, as well as our direct private credit and infrastructure programmes, each of which are mid-market focused.
We have consistently found that the mid- and small market is less efficient and offers opportunities to purchase quality assets at attractive prices. Focusing on the mid-market also means providing our investors with something different from larger secondaries “mega funds” because we are giving them access, by definition, to smaller and sometimes less well-covered names.
You recently hired managing director Matt Shafer to launch your New York office. What are your plans to bulk up the office?
Along with Toronto, London, Chicago, Melbourne, Menlo Park and Montreal, New York represents the seventh Northleaf office, each of which has provided excellent access to dealflow across our investment platforms, including our secondary strategy. The launch of our New York office represents an important step for our private equity business to maintain a local presence in one of the largest financial markets in the world. We have always covered the New York market, but with Matt and the team on the ground there, we’re seeing increased dealflow for our funds and the platform as a whole. Matt’s network, experience and expertise, especially on the more direct and complex end of the secondary market, is proving to be highly complementary and additive to our existing secondaries business. We have a four-person team in New York today and will be adding to that in the near future.
Michael Flood is managing director and member of Northleaf’s investment committee. He oversees the origination, evaluation and monitoring of the firm’s private markets investments and leads its private equity investment team. Flood is also involved in Northleaf’s investor relations and business development activities.