How was this fundraising process different for SL Capital than the previous two?
Our first two funds, SOF I and SOF II, were raised in pretty quick succession and then we were effectively investing them in parallel. This one was more standard in the sense that we had got nearly all of the prior funds invested by the time SOF III was raised.
Having said that, we had some investors who were keen to start conversations last year. We had a first close in October 2016 that was driven by those investors, which was helpful because it meant we had a degree of visibility on the capital-raising process. This year we focused more on attracting new investors. In the end it was around 60 percent existing investors and 40 percent new.
How has your LP base changed?
The vast majority of the money comes from pension funds, from local government schemes in the UK to state and corporate pension plans in North America. There were quite a few investors that came in through multi-family offices – their clients seemed to like the opportunistic nature of the strategy. We’ve made two investments so far out of the new fund – just under 10 percent has been invested in the last six weeks.
What sort of opportunities are you seeing?
The strategy here is to focus on niche areas of the secondaries market and dealflow can come and go depending on the time of year and short-term market cycles. But since the summer there has been a huge pick-up in dealflow generally across the secondaries market and in our space too.
With the headlines around larger deals and the prices people are able to achieve – not just for mainstream private equity assets but a broader range of illiquid funds – it encourages sellers to come to market.
At our end of the market there’s a trickle-down effect and there are plenty of opportunities to look at right now. We are able to be quite selective about what we dig into and what we drop early on.
In this high-price environment, do you find you have to carefully manage investor expectations?
Yes, certainly in terms of deployment pace, less so in relation to returns. Secondaries is an opportunistic strategy. You can’t just say “we are going to go out and buy these three or four buyout funds over the next six months”. We find we go through mini cycles in deploying capital. For example, the first half of this year was pretty tough – we didn’t do much at all. But there have been other times when we have tonnes of stuff on and you get three or four deals done at once, as we have done this autumn. There’s definitely an element of managing expectations, but it’s always been a slightly lumpy market.
At the large end, anecdotally, people are settling for slightly lower returns on the diversified portfolios they are buying but are compensating with leverage. At the moment we don’t feel as though we have to follow those trends very aggressively in our part of the market.
Has the August merger with Aberdeen changed anything for you?
We’re all in a new office together, which is great. Rather than being in the ground floor of an old office building I’m on the fourth floor of a nice new one! Nothing has changed in terms of our secondaries team or approach. We just see the merger as additive. Our new colleagues have complementary secondaries expertise and relationships. Overall, a bigger, broader platform and more resources to work with are real plus points.
Patrick Knechtli is a partner and head of secondaries at SL Capital Partners. He joined the firm in 2009 and also participates in primary fund investments and co-investments. He previously spent eight years at Coller Capital in London and has experience at Baring Brothers and ABN Amro Corporate Finance.