For a strategy based on diversification, the secondaries market has taken an unusual turn.
Last week HarbourVest Partners emerged as lead investor in a $1.9 billion energy fund restructuring. The deal involved forming a fund that acquired the remaining net asset value held in Lime Rock Partners IV, a 2006-vintage vehicle managed by upstream oil and gas investment manager Lime Rock Partners.
The deal is the latest in a string of so-called single-asset fund restructurings. The average secondaries buyer completed between three and four single-asset deals in 2017, according to Campbell Lutyens, a figure the firm’s US partner Gerald Cooper described to Secondaries Investor as “pretty astonishing” given that historically the vast majority of secondaries investors only pursued diverse portfolios.
In what situations do these deals make sense? And why are we seeing more of them?
Typically, single-asset restructurings are being employed in situations where one asset in a portfolio requires extra time or capital to reach maximum value and not all limited partners want to stick around, according to Johanna Lottmann, a director in Lazard’s private fund advisory group.
The rationale is strongest where an asset is subject to transfer restrictions, whether through shareholder or banking agreements that would be triggered by a change of ownership. It’s also just a useful way of wrapping up a fund in a timely manner, in line with the expectations of limited partners.
Deals can also, at least hypothetically, be cheaper than taking the M&A route. Secondaries buyers typically have lower return expectations and therefore a lower cost of capital than direct financial sponsors, so might be willing to pay a little more. And from the GP’s standpoint, there is the added bonus of being able to maintain control of an asset that you believe still has potential.
The increased popularity of these deals is the natural result; increasingly sophisticated buyers are not as troubled by highly concentrated risk as they used to be. At the same time, it’s indicative of the competitiveness of the market and the need to try new things, fuelled by still-cheap financing.
“Traditional LP sales have become much more competitive,” says Cooper. “There’s a need to [do] deals where you can expect a little bit more alpha.”
While the comfort level with these deals has increased, not all firms have the capabilities to do due diligence right down to company management level in the timeframe required. This is why the most active buyers tend to be those with broad direct investment platforms, such as Goldman Sachs.
Diversification remains a crucial requirement for secondaries buyers but growing numbers won’t let its opposite get in the way of a good opportunity.
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