Recycling by secondaries funds more than doubles – Triago

Secondaries funds are increasingly taking advantage of recycling provisions, according to research by Triago.

In a survey of 24 firms for its latest quarterly report, the Paris-headquartered placement agent and advisor found that secondaries vehicles raised between 2013 and 2019 used 19 percent of committed capital for repeat purchases, compared with 8 percent for vehicles raised between 2008 and 2012.

“In a market place characterised by high prices, recycling is another means to leverage returns, similar to loans, deferred payments and preferred equity,” Triago concluded.

It is unusual for recycled capital to be used for more than two deals and managers can usually only recycle capital from investments that have been realised within two years, it added.

Recycling provisions are mainly to ensure that as much of a limited partner’s commitment as possible is invested and does not leak out in the form of costs, James Bromley, a partner in Weil, Gotshal and Manges’ private funds group, told Secondaries Investor.

“One reason it’s increasingly common in the secondaries market is you’re looking at shorter investment time horizons,” Bromley said. “If a fund has a five- or six-year investment period, it’s quite possible that investors will be getting distributions from earlier investments during that period and both the manager and investor will want to benefit from reinvesting the acquisition cost.”

The amount that can be reinvested is normally limited to cash drawn down in relation to fees and expenses, and a proportion of acquisition costs in cases where an investment has been realised more quickly than originally anticipated, he added.

Recycling can boost the multiple of a secondaries fund by allowing a manager to double down on successful deals, a spokesman for Triago told Secondaries Investor.

“Virtually all major secondary funds now have clauses in their LPA permitting recycling. A decade ago, few did,” the spokesman said.

In a guest commentary last year, Nigel van Zyl, a partner with law firm Proskauer, said investors may be supportive of recycling as it enhances returns and narrows the gap between net and gross internal rates of return. On the other hand, LPs may reject re-investment if they believe the GP is doubling down on a poor portfolio or is over-invested and has run out of follow-on capital to develop its acquisitions.