Healthcare specialist Revelstoke Capital Partners has turned to the secondaries market on at least two occasions: in 2019 it used a GP-led process to hold onto Upstream Rehabilitation, an outpatient physical therapy provider held in its 2013-vintage debut fund, and again the following year to hold onto rural communities care provider Fast Pace Health.
Secondaries Investor caught up with Simon Bachleda, managing partner and co-founder at the Denver-headquartered firm, to find out more about why it made sense to seek a GP-led secondaries process and what he learned from the experience.
What were some of the biggest questions and concerns you had before you embarked upon your first GP-led secondaries deal, and how did you overcome them?
We wanted to provide transparency about the structure of the process and transaction, ensuring that our existing investors were fully informed in evaluating the transaction and their options. Setting clear expectations for identifying and mitigating conflicts is a critical element of the success of a GP-led secondary transaction. As a result, engaging limited partners and the limited partner advisory committee (LPAC) members as early as possible to provide the rationale for the transaction as well as to solicit input and recommendations was extremely helpful to ensure successful deals.
Moreover, particularly for larger and more complex transactions, having an advisor manage the process can ensure a competitive bidding process. In addition, selling limited partners may benefit from an independent assessment of the asset together with a formal fairness opinion stating that the cash price offered is fair from a financial point of view.
What specific issues did you want to address in your portfolios and how has utilising the secondaries market helped you address these issues?
As an industry, private equity is generally conditioned to sell its best performers as early as possible, realise a gain and provide liquidity to its investors. The significant work that goes into building the management infrastructure, broadening the operational capabilities and increasing the overall scale of an organisation may take several years and result in significant gains in equity value; however, in certain trophy assets, there is significant equity value creation beyond the initial holding period. In these scenarios, a single-asset SPV can be a win for limited partners, management and the private equity sponsor.
For limited partners, it provides the option to elect liquidity if they desire cash or to reinvest for continued potential upside. For management and employees of the portfolio company, it provides an opportunity for partial liquidity and value realisation but at the same time lets them continue building the business with the same sponsor, avoiding any risk of “new ownership” and the significant disruption that a traditional exit process causes.
Finally, it allows for the private equity firm to continue to execute on its growth strategy through continued board governance in a company that it knows extremely well while extending the partnership with the management team with whom it has had a productive relationship.
Did you consider any other processes in addition to a secondaries deal such as an M&A sale, fund extension, preferred equity financing or NAV loan, and why did a GP-led secondaries process win out?
In our particular cases, we wanted the option of providing liquidity to our investors, locking in a strong return for our fund while at the same time continuing our successful partnership with management and governance of the portfolio company. The optimal solution to accomplish these goals was a single-asset SPV. Furthermore, the significant supply of capital and liquidity in the secondary market makes a GP-led secondary process a competitive and viable form of exit.
Simon Bachleda is manging partner and co-founder of Revelstoke Capital Partners