How would you describe the private equity and real estate secondaries market so far this year?
IC: The big change this year that has affected private equity and real estate is the return of the large, $500 million-plus transaction. On the real estate side we’ve already had one $1 billion-plus transaction. On the private equity side, less than 10 percent of total market value came from transactions bigger than half a billion dollars in 2016. This year, there have already been seven transactions north of $1 billion.
The return of large deals is powering volume in 2017. GP-centric transactions, which have been a large part of the private equity market for the last four or five years, are starting to contribute to real estate secondaries volume. If this trend continues, it will unlock significant dealflow in the years ahead.
JS: Real estate secondaries volume has been on an upward trajectory, growing approximately 25 percent per year since 2008. Over the past few years, volume has fluctuated significantly. Deal volume was $4.8 billion in 2014, but in 2015 it was more than $8 billion because of two large public pension fund transactions. Last year, volume declined to roughly $5 billion because there were no mega transactions, although it was a record year for the number of transactions completed. It’s too early to tell, but this year’s transaction volume is trending north of what we saw in 2016 and could potentially approach the record achieved in 2015.
How has this environment affected the types of secondaries deals Landmark has been investing in over the last 12 months?
IC: Landmark has a long history of innovation in private equity, real estate and real asset secondaries. We have tried to find situations where the seller isn’t looking for liquidity; they’re looking for a solution. They’re trying to change their programme, portfolio or fund and optimise risk return, but they don’t necessarily want to sell outright. Our private equity and real estate teams have had the largest 12-month deployment numbers ever. The last 12 months of private equity secondaries deployment have been the most active in the firm’s 28-year history.
Secondaries Investor wrote about some of Landmark’s interesting, non-traditional deals this year. Could you elaborate on them?
IC: We have led a number of proprietary, structured deals with GPs and LPs and some creative GP-centric transactions. Some of these investments are common knowledge in the market, but most of them haven’t been publicly disclosed. Earlier this year, our European private equity team closed its second GP-centric transaction with ICG [where Landmark backed a €650 million restructuring of ICG’s 2010-vintage mezzanine fund]. Your reporters also covered our partnership with InvestIndustrial [where the Italian private equity firm raised a fund to buy €750 million of assets in its own 2008-vintage fund]. We just closed two complex structured transactions with mid-market sponsors in the US and in Europe. We’ve seen very good relative value in Europe.
Our private equity team has also been active in helping GPs finance growth and transition their platforms, as an alternative to GP minority stake transactions which aren’t necessarily great transactions for underlying investors or next generation teams. PEI reporters covered our partnership with the founders of Clearlake Capital, where we partnered with the management team to help them acquire the economic interest in their firm from Reservoir Capital.
We have done two other structured private equity deals this year with a large family office and a marquee GP. In one of the first trades of its kind, we bought an investor out of their $500 million separately managed account. We believe that’s something that will occur more often in the secondaries market as the growth and proliferation of SMA formation after the global financial crisis starts to mature.
These deals are not easy or cookie-cutter. You have to find them or find the solution that other people haven’t considered.
How do you identify deals and how do you structure these innovative deals?
JS: Landmark applies a proactive thought-partner approach to source transactions. We have an in-house Quantitative Research Group that analyses data from the funds we’re invested in and information from select third-party data providers, global LPs and GPs. We have developed proprietary analytical tools that enhance portfolio management decisions for LPs and GPs. These tools help us engage in thought-partner discussions with LPs, many of whom are not even considering selling.
During initial conversations with potential deal partners, we try to understand their near-term and long-term portfolio management objectives. We apply our quantitative tools to analyse portfolios and provide customised solutions. We work in a similar thought-partner fashion with GPs to help firms understand how secondaries capital could be utilised to restructure mature funds, recapitalise assets or help achieve strategic growth initiatives across a GP’s platform.
Stay tuned for part 2 of our Q&A.
This article is sponsored by Landmark. It appears in the September issue of Private Equity International magazine.