When Benjamin Revillon set up BEX Capital in 2010 to buy small stakes in high quality and well-known funds, he discovered the barriers to entry were a little too low.
“I found that trade very crowded,” Revillon tells Secondaries Investor in an interview in the firm’s Paris headquarters. “What I found was that the market had really transformed itself into a big volume game with people chasing returns and it becoming a seller’s market. I felt that everything was pricey.”
The former AlpInvest Partners and Deutsche Bank executive found a solution: pivot to buying stakes in secondaries funds and funds of funds themselves in a strategy he refers to as going back to the “original rulebook” of secondaries.
“You have all the ingredients,” he says. “You have assets which are diversified, of high quality when filtered out by quality fund of funds managers and you tend to buy them at a discount to intrinsic value. ”
Over the last eight years BEX has transformed from a deal-by-deal model to raising two blindpool funds. Its latest, BEX Fund II, closed in September above its €80 million target on €120 million, according to PEI data.
Drivers of dealflow in this part of the market are the same as the broader market, Revillon says. LPs in secondaries and funds of funds want to be able to manage their portfolios in the same way they manage their portfolios of direct funds.
Acquiring interests in secondaries and funds of funds means the strategy must take into account various fees: those at the underlying fund level, those charged by the fund of funds or secondaries fund manager as well as any carried interest levied by those managers. Are discounts in the strategy low enough to make the play work, rather than bypassing the managers and acquiring the underlying fund stakes themselves?
Revillon says his strategy does. With funds of funds and secondaries managers reluctant to sell to competitor secondaries firms who would be getting a “look into their kitchen”, competition is reduced. Pricing is therefore not pushed to the same high levels as high-quality buyout stakes, which often traded at a 10 percent premium to net asset value last year, according to a May report by Credit Suisse.
It can also be more efficient to acquire a fund of funds or secondaries stake in one go, rather than signing sales and purchase agreements for 25 separate vehicles, Revillon adds.
On the face of it, secondaries and funds of funds are similar vehicles, differentiated solely by the timing in which their underlying assets are acquired. When looking at them from a secondaries lens, notable differences emerge. Like funds of funds, secondaries funds are highly diversified vehicles but quality can be more patchy as secondaries managers acquire assets on an opportunistic basis, as opposed to a primary basis.”[Secondaries funds] can be a mixed bag and relatively opaque in terms of assets and economics,” Revillon says.
There are other elements to consider, such as secondaries being more expensive because managers always charge carried interest, which is not always the case with funds of funds. Leverage use in secondaries funds can further complicate things.
“There’s no limit to financial engineering and creativity in secondaries funds, either with leverage facilities or deal financing,” Revillon says.
While its giant Parisian counterpart Ardian raised the largest secondaries fund ever with its $10.8 billion haul for ASF VII and is seeking $12 billion for its latest iteration, BEX prefers to keep things small. Still, there’s room for growth and dealflow is plentiful – BEX saw $3 billion worth of fund of funds and secondaries fund opportunities last year. Just how big the market is for stakes in secondaries and funds of funds is a question Revillon grapples with.
“€120 million is too small versus the opportunity,” Revillon says, referring the firm’s latest fund. The firm is still in the discovery phase as to what the optimal fund size would be, he adds.
With Fund II more than 60 percent deployed, a vehicle that better captures the size of the opportunity may be just around the corner.