Secondaries transaction volume was steeply down in the first half as uncertainty over asset valuations drove a wedge between the expectations of buyers and sellers. Still, some deals did get done, as buyers with large pools of dry powder met sellers keen to divest non-core assets.
Mathieu Dréan, managing partner of Paris-headquartered advisory firm Triago, spoke to Secondaries Investor about what he saw in the market during the first six months of the year.
What types of deals have you been working on since the onset of the pandemic?
We’ve had a continuous flow of sales mandates since the wave of lockdowns began in mid-March. They range from traditional limited partnership fund stakes to single-asset sales and cover mega-buyout, growth, venture capital and credit. In June we closed on three deals, all LP fund stake portfolios, and we’ve got four in closing mode, including a single-asset continuation vehicle. They have loads of return potential – mediocre doesn’t sell. Mandate values range from $50 million to slightly more than $250 million. The latter is the single asset.
We had heard that buyers and sellers were not able to meet on price because of a lack of certainty about valuations. What kind of pricing did you see on the deals you closed?
They were priced off Q4 2019 net asset values and were in principle sold for double-digit discounts. But the pricing translates into 90 percent or better on a roll-forward basis, given the falls in net asset value we all know occurred in March. GPs we’re speaking to now indicate performance since March is flat compared to public market gains, so these deals are still in a real-time range of some 90 to 95 percent of fair value. The sellers – in no way distressed – were clever, as are those braving the market now. Selling today is about unloading non-core assets in an uncrowded market, ahead of a sustained global slowdown likely to push average asset values down. With few fund distributions, these sales generate liquidity that sellers are reinvesting in crisis-related opportunities.
What types of buyers have you been closing deals with?
We’ve been closing with market specialists. They’re either pure secondary funds or diverse players with dedicated secondary teams. The common thread is eagerness to invest significant pools of unused capital earmarked for secondaries in a market characterised by dearth. One buyer told us his firm was looking at only four deals in June, three offered by us. In a typical month, the firm would have two dozen deals to choose from.
Many people say the market’s frozen on both sides of the Atlantic, with France the exception…
Those assumptions miss the mark. Only two of the deals we’ve closed, or are about to close, involve buyers or sellers in France. These deals bring together a diverse group of buyers and sellers throughout the US and Europe trading a varied list of names, including Apollo, New Enterprise Associates and Insight Partners. While some buyers are extremely cautious – a few big players haven’t held an investment committee meeting since March – many others view this as a great time to make deals. Given the appetite of buyers, the small number of opportunities on the market and the likelihood that many funds will see flat to declining NAV going forward, waiting until the autumn to put assets up for sale is not necessarily the wisest course of action.
How much of a challenge was it to close the deals in terms of getting the documents signed, scanned and ticked off?
Oddly enough, the administrative process of closing deals is somewhat easier now than prior to the crisis. Buyers, sellers, lawyers and service providers are working from home, doing business remotely and signing electronically in a system that’s working well. But because of the market slowdown we’re getting pretty much all of their attention.
How can buyers get comfortable diligencing a single-asset deal when working remotely?
While in many instances investors don’t feel they can adequately vet companies, there’s a certain single-asset profile that investors feel strongly drawn to. Investors are quite comfortable remotely diligencing non-cyclical firms with demonstrable long-term growth prospects. The single asset we’re closing on is in healthcare, which has gotten a boost from the crisis. This company is beating its pre-crisis profit and revenue forecasts. Given the clarity of the business model and those numbers, it’s actually been oversubscribed by a factor of two.
In the three deals you closed, were there any shared characteristics in terms of the amount of unfunded and funded portions or the age of the funds?
Those deals are light on tail-end, 10-year-old-plus funds. And notably, the asset value of one of the done deals was more than 50 percent weighted by a highly unfunded credit vehicle – the stake’s value was $50 million. Buyers today really like the return prospects for largely uninvested funds. Those funds should be able to structure some very attractive returns, given the acute liquidity needs of otherwise first-class companies.