I recently spent two days in Zurich meeting secondaries firms and discussing the state of the market over coffee and chocolate. Every encounter was useful, but my 70 minutes with Nathalie von Niederhäusern, head of private equity for EMEA at BlackRock, were by far the most thought-provoking.
Von Niederhäusern believes secondaries have been “over-hyped” and that the market is set for a wake-up call when deals done “in a rush and in a hype” since 2014 start to underperform.
“There will be an awakening in the secondaries market and there will be more scrutiny on secondaries,” she predicts.
BlackRock occupies a unique space in the market. With $5.1 trillion under management, it is the world’s largest asset manager, but prefers to not invest its private equity capital in secondaries, focusing on selling stakes instead. And, because it does not manage dedicated funds in the sector, it can afford to hold off when it doesn’t like the risk-return profile of a deal.
This isn’t to say BlackRock doesn’t buy at all – it does – but it does so on a very opportunistic basis. When it buys, it finds deals in sectors with high barriers to entry, such as healthcare and financial services, especially in Europe, von Niederhäusern told me.
Much of the unit’s buying these days is done through comingled products and separate mandates. And it has been active in GP-led fund restructurings over the last two years: the unit has participated in two, including a $500 million syndicated deal, and was working on two more in late November.
The biggest change to the unit came in 2012 when, at a single stroke, it doubled its private equity asset base to around $15 billion by acquiring Swiss Re’s private equity and infrastructure fund of funds business. The reinsurer’s secondaries capability was a particularly attractive part of the business, according to managing director Lynn Baranski, who told sister publication Private Equity International in 2013 that BlackRock wanted to leverage the Swiss Re team’s ability at sourcing, analysis and execution of transactions, for buying and selling.
The other attraction for BlackRock was the platform’s infrastructure expertise across primary, secondaries and co-investments. While von Niederhäusern didn’t comment on that asset class during our interview, it’s clear BlackRock sees it as a potential boom area.
Holding off investing in secondaries seems to be something BlackRock is comfortable with. Other firms with money to deploy have carried on investing this year, resulting at times in unexpected outcomes: just look at the rebound in non-traditional deals, like KKR’s off-balance sheet transaction in the second quarter, and the creative GP-led fund restructurings which feature in our Secondaries Deal of the Year categories for the PEI Awards 2016.
Less dealflow, high pricing and greater competition have clearly spurred the creative juices of deal teams around the world. We, of course, don’t know whether these innovative deals will ultimately deliver; in the meantime, BlackRock are either the smartest guys in the room, or destined to discover in the future that they’ve missed the boat.