This week it emerged that Nordic direct secondaries firm Verdane Capital Partners had raised its first-ever buyout fund, Verdane Edda, collecting around SKr 3 billion ($363 million; €294 million) for the strategy and closing on its hard-cap.
If you're not familiar with Verdane, you should be. The firm, which opened an office in London last year to complement the four in the Nordics, has returned to market on average every two-and-a-half years since 2003 with its flagship direct secondaries vehicles. The latest – Verdane Capital IX – raced to final close in just five months and has deployed around 50 percent of its Skr3 billion in under two years.
It's clear the firm has little trouble finding attractive deals. How? The Nordic region is "arguably the most digitally savvy" and is over-represented in terms of technology companies, managing partner Bjarne Lie told sister publication Private Equity International on Wednesday. While Verdane is not a tech-focused firm, the sector is throwing up plenty of opportunity.
While Verdane has traditionally acquired portfolios of direct stakes, almost half the deals from its latest secondaries fund have so far been single assets and some were majority acquisitions, such as Norwegian software company Lingit.
According to Lie, the firm decided to launch its dedicated buyout fund after realising there was a hole in the market neither its direct secondaries vehicles nor international tech-focused buyout firms could serve. With Edda – named after a piece of Norse literature – the firm can invest up to €50 million per company, more than triple the €15 million limit of its direct secondaries vehicles.
Verdane isn't the only direct secondaries specialist to have acquired majority stakes in single companies. Hong Kong's NewQuest Capital Partners acquired 100 percent of back-office outsourcing firm Integreon in 2016 using its third direct secondaries fund and Vision Capital Partners picked up a majority interest in Swedish niche bank Nordax Group in 2010 through its Fund VII. The dividing line between a direct secondaries fund and a regular PE firm that does secondary buyouts has always been unclear.
Verdane's move is not a sign of waning interest in direct portfolio deals – the Edda fund is in addition to, not instead of, its established direct secondaries line. It is instead an indication that investors are willing to back new propositions from established managers that have demonstrated an ability to deploy capital in a challenging investment environment.
Where do you see the future of direct secondaries? Let us know: email@example.com or @adamtuyenle
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GP-led secondaries could surpass $20 billion in volume this year as sellers and buyers take advantage of favourable conditions, according to research by Lazard obtained exclusively by Secondaries Investor.
Around $16 billion traded in sponsor-led transactions in 2017, a rise of almost 130 percent compared with a year earlier, the advisory firm wrote in its Financial Sponsor Secondary Market 2017 Year-End Review. This represents around 30 percent of global deal volume.
Deal volume could rise in 2018 due to high pricing, buyers having access to more robust information, GPs being more actively involved and selection bias in such deals as GP-leds generally tend to be of high quality.
Lazard clients obtained premiums "across the board" for the first time last year, the report noted.
"2017 was a watershed year for this portion of the secondary market, as the market developed from one dominated by 'restructurings' to one dominated by 'liquidity events' executed on behalf of financial sponsors, many with significant brands," the report noted.
Advisors increasingly focused on GP-led deals last year. Such transactions accounted for the majority of deals by value for Axon Partners, Campbell Lutyens, Credit Suisse, Evercore, Lazard and Rede Partners, as Secondaries Investor's annual advisory firm survey found.
Lazard estimates there is at least $9 billion in net asset value worth of GP-led deals in market, in the process of closing or about to launch as of the first quarter of 2018.
Large blue-chip GP-led processes have made headlines in recent months, including Nordic Capital's restructuring of its 2008-vintage fund – the largest GP-led restructuring involving around €1.5 billion in NAV – and Thomas H Lee Partners' potential transaction involving its 2006-vintage buyout vehicle, as Secondaries Investor reported.
Here are some key takeaways from Lazard's report:
- Around 90 percent of last year's deal volume was executed by 14 secondaries buyers.
- APG Group, Canada Pension Plan Investment Board and the Government of Singapore Investment Corporation played significant roles in GP-led deals across private equity and infrastructure. These three traditional LPs "can and do lead these deals and are a real and growing force in this market", Lazard noted. The firm expects more traditional LPs to develop the in-house skills and replicate the models of large secondaries buyers, creating increased competition.
- Real estate GP-leds hit around $1 billion in deal volume, accounting for around 5 percent of the market. Yield-oriented direct investors, such as pensions and sovereign wealth funds, are "actively looking" at such opportunities.
- Lazard expects GP-leds in Asia will "substantially increase" and the US will overtake Europe as the largest region for such deals.
The secondaries portfolio of Florida State Board of Administration is the pension's second-best performing strategy since inception, according to documents prepared for the pension's 19 March investment advisory council meeting.
Secondaries investments generated a since-inception internal rate of return of 15.9 percent as of 30 September, the documents reveal. The only strategy to achieve better returns was distressed, which returned 20.5 percent.
In terms of its ability to beat the benchmark, secondaries lagged all other strategies in Florida's private equity portfolio. The Cambridge Associates secondaries benchmark was 14.8 percent as of end-September 2017, meaning the pension's portfolio cleared it by 1.1 percentage points.
The pension's distressed portfolio beat its benchmark by 10.5 percentage points, non-US growth equity by 4.4 percentage points and non-US buyout by 3.4 percentage points.
Cambridge's benchmarks calculate the median return of the strategy net fees and expenses.
Secondaries has also underperformed over certain reference periods. Over a three-year period the portfolio returned 10.5 percent, with non-US growth equity the only weaker performer on 10 percent. Secondaries is also the pension's weakest performer over 10 years, returning 8.9 percent against 11.2 percent for Florida SBA's entire private equity portfolio.
The secondaries portfolio is split between Lexington Partners and Ardian, according to a list of the pension's holdings in the documents.
It manages $209.7 billion in assets, according to the documents, with private equity accounting for 6.5 percent of the total.
Verdane Capital, a Scandinavian direct secondaries specialist, has held the final close on its first direct buyout private equity fund on its SKr3 billion ($365.5 million; €297.4 million) hard-cap.
The significantly oversubscribed Verdane Edda fund – which launched in October – secured around 40 percent of its commitments from Nordic limited partners by value, managing partner Bjarne Lie told sister publication Private Equity International. Around 40 percent were from European LPs, comprising mostly UK and Swiss investors, and the remaining 20 percent originated from the US.
“We are worried about the overall pricing that's in the market and didn't want to feel the pressure of deploying too large a fund too fast in this macro context,” Lie said.“We didn't really try to maximise oversubscription – that’s doing everyone a disservice. It's about managing it in the right way to avoid broken glass and all those people wasting their time.”
Verdane Edda will be the first of its vehicles to target strictly direct transactions in single companies. The fund – which was advised by Rede Partners – will seek controlling or co-controlling stakes through equity tickets of up to €50 million, with a sweet spot of €15 million to €30 million.
“What we have felt was really a hole in the market starting from where we stop investing with the Verdane Capital series and ending where international technology-focused houses get out of bed and start investing ticket size-wise,” he added. “The paradox we've struggled with is that in the Nordic region, which is arguably the most digitally savvy and overrepresented in terms of these sort of businesses, didn't really have a player like that.”
Verdane’s strategy with its Edda fund is due in part to recent successes in its direct portfolio. In May the firm partly exited its stake in Nordic e-commerce platform Boozt via an initial public offering after growing its annual turnover from €12 million to over €200 million within five years.
The Oslo-headquartered firm has previously raised six direct secondaries vehicles targeting portfolios of technology-enabled Nordic companies and direct investments of up to €15 million, according to PEI data. It will continue to pursue portfolios through its flagship series of funds, Lie noted. Verdane Capital IX, an SKr3 billion 2016-vintage, is around 50 percent invested and a successor is likely to come to market in the next 12-18 months.
“The direct mandate so far has been embedded in the broader portfolio and small direct fund, with the majority of the capital earmarked for [the former],” Lie said. “We want to leverage what we've learned over the past 15 years to be able to support slightly larger companies.”
"We have decided to move away from those traditional primary fund of funds platforms and to [instead] build mandate solutions,” Olivier Decannière, head of mandates at Ardian, told sister publication Private Equity International.
“We saw the evolution of the market,” he added. “LPs are becoming more sophisticated and have internal constraints, whether it's regulatory or specific strategies they have to develop."
Paris-based Ardian deploys on average $1.5 billion to $2 billion of investors' capital into funds each year through its mandate programme, up from $500 million annually three years ago, Decannière said. It manages around $10 billion-worth in primary mandates.
The firm is well-known for its fund of funds model, having deployed more than $15 billion in secondaries transactions and primary commitments between 2014 and 2016, according to its website. It amassed a further $14 billion for the strategy in April 2016, comprising $10.8 billion raised through its secondaries platform and $3.2 billion for primary investments.
Primary funds of funds have been losing their appeal in recent years. Increasing pressure on valuations has threatened to narrow returns and render the additional layer of fees somewhat unattractive to investors.
Capital raised for funds of funds fell to $11.4 billion in 2017; a 10-year low, according to PEI data.
“Traditional primary fund of funds are constrained by a double layer of fees, so you're paying for the fund of funds and underlying fund you invest in,” Decannière noted.
“That created a bit of a problem for a lot of institutions. So we decided we can keep offering that kind of product for the people who are willing to access those, but that part of the business I would say has reduced over time and is now stable.”
Ardian is instead focusing more on individual mandates for LPs, offering them access to its 1,400-strong portfolio of funds while charging just a single layer of fees. Costs are based on net asset value of their portfolio rather than the size of commitment or fund and can vary depending on the complexity of reporting desired by each LP.
It is not alone in this move. In May Hamilton Lane collected $70 million in capital from nine Finnish limited partners for a separately managed account, the first time it formed a mandate for a group of investors. The fund will invest in US and European large-cap buyout funds, which the LPs would be too small to access directly on an individual basis.
“Most of our new mandates are mainly pension funds and insurance companies,” Decannière said. “Some of the public pension plans in some European countries haven't had that much private equity exposure and in the global macroeconomic environment they understand there's a need, or an appetite at least, to reallocate a bit more of their resources to private equity.”
More than 70 percent of Ardian’s mandates are from European LPs, he added. The firm is also in discussions with LPs from Asia and Latin America.
“You have a lot of money flowing into this asset class now, and that's why we're trying to play a role.”
[caption id="attachment_24149" align="alignleft" width="180"] Dan Nolan[/caption]
Tell us about the makeup of Duff & Phelps’s secondaries market advisory team and which part of the market you are focusing on.
DN The team consists of 12 team members, with half of our team concentrated in our two primary hubs of London and New York, and the rest positioned in Boston, San Francisco, Hong Kong and Mumbai. As well as our core secondaries team, we benefit from members of the wider alternative asset advisory practice representing us on the ground in more than 70 locations across Europe, Asia and North America. The make-up of our team is quite different from other advisors as we have attracted individuals from both the intermediation and the buy-side space.
You recently added two Tullett Prebon secondaries professionals, Bill Arnold and Dan Nolan to your London team. Why and what do they bring to the team?
RO I have personally worked with Bill and Dan for nearly seven years, first as an investor, and now as a colleague. I’m proud to have such experienced professionals for colleagues, and we enjoy a good team chemistry.
As a firm, our relationships with sponsors are very deep, span many years and many fund vintages, and that trust and reliability form the core of our Duff & Phelps brand. Having Bill and Dan on board enhances our capabilities to work with sponsors by putting them in touch with a broad set of traditional and non-traditional secondaries investors to find solutions to their unique circumstances.
[caption id="attachment_24150" align="alignright" width="180"] Richard Olson[/caption]
From a deal execution perspective, Bill and Dan have transacted with dozens of buyers over hundreds of transactions totalling billions of assets, so we knew that we would be gaining two safe pairs of hands who know the market extremely well.
DN Our motivation to move to a well-known advisory platform like Duff & Phelps was based purely around our desire to expand our offering to better compete as the secondaries market has evolved. Over the past few years we found that an execution-only pitch was becoming harder to win GP mandates so we needed to provide a broader array of services. Our reputations and experience at our prior firm were enough to get us in the door but we suffered in many cases because our service offering was perceived to be limited to intermediating trades in LP interests. Duff & Phelps knew that it needed a team of complementary individuals capable of delivering a full-service advisory offering to its clients.
Is there a different skillset required when completing LP transactions compared with more complicated GP-led deals?
[caption id="attachment_24151" align="alignleft" width="180"] Bill Arnold[/caption]
BA Dan and I have completed some very large processes both at an LP and a GP level. One thing that is necessary across both is the high level of accuracy and diligence required to successfully complete the transaction. On an individual basis we and our colleagues have completed billions of dollars in transactions across hedge, private equity and real estate funds. A lot of this took place at a GP level, so I think that we are well-placed to build upon our knowledge base. The main differentiator for us will be our level of service and also our client base. Being able to offer advisory services as well as the other services of the firm is a huge benefit for us in winning GP-led business.
Duff & Phelps is well-known for its third-party valuations business. How do you navigate potential conflicts of interest with the launch of your secondaries advisory business?
RO The secondary market advisory group operates as a fully independent team within Duff & Phelps. Our reputation for independence is paramount to us as a firm and we will always take the necessary steps to ensure that this reputation is uncompromised. All of Duff & Phelps’s work is meant to benefit our clients, and we therefore have instituted proper controls and governance around a GP’s fiduciary duties and responsibilities. In any GP-led secondary, if for instance we already have a role as an independent third-party valuation provider, our advisory role is functionally and operationally distinct from our valuation work. We operate as a regulated business, in conformance with Financial Conduct Authority and Financial Industry Regulation Authority regulation and guidance. As such, we zealously guard client information, and we maintain strict walls between and within our project teams.
Many say the advisory market is crowded and highly competitive. How do you plan to differentiate yourselves
RO Reputation, coverage, and excellence. We are a trusted brand with a global presence and our broad service offering makes us a valued partner for our clients. Our team is experienced and that collective experience spans the full range of asset classes and geographies. What we don’t know ourselves, individually, we can tap into our 2,500-person firm. The secondaries market as a whole may appear competitive in terms of numbers of intermediary service providers, but Duff & Phelps provides unique advisory capabilities for alternative asset managers. We will choose our engagements in a way that we know we can deliver.
Dan Nolan and Bill Arnold are directors in Duff & Phelps's secondary market advisory practice. Both were previously with Tullett Prebon where Arnold co-founded the firm's secondaries market operation and Nolan was a senior broker.
Richard Olson is managing director leader of Duff & Phelps’s European secondary market advisory practice. He was previously a managing director at Origami Capital Partners where he was head of research and the head of European origination.
Blackstone's Strategic Partners has surpassed the target of its latest real asset secondaries fund and is set to continue raising.
According to a filing with the Securities and Exchange Commission, Strategic Partners Real Assets II has raised $1.69 billion. This is not a final close, Secondaries Investor understands.
Another filing for an associated offshore vehicle shows $572 million in funds raised. It is not clear if the two figures should be added together.
The fund's target is $1 billion, according to a presentation prepared for Pennsylvania Public School Employees’ Retirement System, which revealed that SP RA II will be “primarily seeking capital appreciation through the purchase of high-quality real assets from investors seeking liquidity prior to fund termination.”
SP RA II made its first sale in April and is using the Uruguayan subsidiary of Compass Group, a Pan-American private equity advisor, as a placement agent, according to the filings.
The portfolio is expected to include utility, power generation, energy renewables, transportation, waste management, shipping, parking and midstream and upstream energy industries, according to the documents.
It aims to do deals ranging in size from $100,000 to $150 million or more, and expects a majority of its investments to be in funds managed by US, UK and western European managers. SP RA II will have a 12-year term with four one-year extensions, the PSERS documents reveal.
PSERS committed $200 million to the fund, according to PEI data.
SP RA II is set to be one of the largest real assets secondaries fund yet raised. In 2017 Ardian raised $1.7 billion for its seventh infrastructure fund, exceeding its $1.5 billion target.
Strategic Partners declined to comment.
The idea of investing in India, with its burgeoning technology sector, has long been attractive to private equity firms. The country was experiencing an increase in private inflows when the 2008 financial crisis blew the doors open, as investors were compelled to look further afield for returns.
According to data from EMPEA, 100 firms launched private equity vehicles targeting India between 2006 and 2009. In 2008, $8 billion was raised for India-focused private equity funds, a level not seen before or since.
It is clear the country wasn't ready for this influx. Huge amounts of dry powder were met by unpalatably high valuations. A lack of exit opportunities and the appreciation of the dollar, among other significant challenges, added to the deployment struggle.
"[This] all added up to a comedy of errors, with the end result being that India’s private equity performance did not meet expectations and both GPs and LPs lost money," wrote EMPEA in its 2016 Private Equity in India report.
A decade later India is a more pronounced version of what has taken place elsewhere: funds coming to the end of their lives with a lot of net asset value and GPs and LPs with different ideas of what should happen next. Consequently, there has been a marked increase in secondaries opportunities, with HarbourVest Partners, NewQuest Capital Partners and TR Capital among those lining up to take advantage.
“A lot of PE managers understand we are the solution to the problem,” said one secondaries manager.
Potential but not there yet
Secondaries buyers encounter three main types of situation in India: crisis-era GPs that raised a fund but were not able to raise another, those who were able to raise a second but not a third, and teams investing in India from global funds looking for a partial or total withdrawal.
The first two sets of circumstances throw up many opportunities for GP-led processes. These GPs are often under pressure to generate returns for their LPs and show that they still have a proposition worth investing in, or they at least want to maintain a stream of fees for as long as they can.
Such deals can be tricky. Often key people have left the fund, weakening the alignment between GPs and LPs and resulting in a lack of vision as to how portfolio companies will achieve exit. This is especially critical in an emerging market, where less developed capital markets can make holding periods longer. Where such transactions do make sense, they tend to be the preserve of Asia specialist secondaries firms.
"Your large global secondaries funds are not likely to be interested in them," says Amit Gupta, partner and head of India at NewQuest. "They are complex deals. You have to align the team in the right way and ensure that a lot of things fall into place; it’s just not what global secondaries funds want to do."
The third type of deal, which involves global funds seeking to reduce or eliminate their exposure to India, is most attractive to global secondaries funds, given the established names involved. These nearly always take the form of a direct secondaries sale, such as media company IDG's 2017 disposal a number of Indian stake as part of a $600-million-plus portfolio sale to a consortium led by HarbourVest.
Warburg Pincus showed last year, with its $1.2 billion sale of a strip of Asian assets, that a direct secondaries sale isn't the only way to reduce exposure to a market. While no market sources Secondaries Investor spoke to for this piece believed that a deal of similar magnitude was likely in Asia this year, many hoped that as GP-led deals gain traction in India, more global names will choose to stick it out with a fund extension rather than leave the market.
"Many VC funds have taken a call because of lack of liquidity and longer hold cycles [in India] compared to their global cycles," says one secondaries buyer. "You still have the whole team, the right information, the basic management structure of the portfolio – that’s where I think there will be a lot more [GP-led] deals."
Awareness of GP-led processes does seem to be growing among GPs. According to Gupta, 80 percent of managers he speaks to know how a GP-led restructuring works, even if they don't believe it is the right solution for them.
Sabina Sammartino, head of secondaries advisory at Mercury Capital Advisors, which opened a New Delhi office in January to add to its deal origination and project management business, says she expects to see an increase in the number of complex secondaries deals in India over the next 12-18 months.
"Valuations are quite full [in Indian VC] which coupled with still limited realisations should trigger an increasing number of secondaries transactions," she said. "As we have seen in the US and Europe, as more transactions get done, the level of comfort, the knowledge and understanding will increase."
HarbourVest Partners has raised $1.7 billion to be deployed outside the US.
The HIPEP VIII Partnership fund of funds will target primary fund investments, secondaries and direct co-investments in Europe, Asia and other emerging markets, according to a statement. It launched in December 2016 with a $1 billion target, according to PEI data.
HIPEP VIII began investing capital in May and is already 29 percent committed, the statement noted.
The fund has 40 investors from countries including Germany, Japan, the UK and the US. These include Chicago Teachers' Pension Fund which committed $10 million, Dorset County Pension Fund which committed $25 million and New Hampshire Retirement System which committed $50 million, according to PEI data.
“This latest fundraise shows the demand from existing and new investors for global, ex-US private equity,” said managing director Carolina Espinal. “Our thematic strategy resonated with investors targeting the region due to the flexibility of access to value and growth opportunities and a diversified cashflow profile.”
HarbourVest's last dedicated secondaries fund Dover Street IX held its final close on $4.8 billion in November 2016, exceeding its target by more than $1 billion. The fund had been in the market for 15 months.
Last April the firm raised $366 million for a real assets secondaries fund. Real Assets Fund III acquires stakes in energy, power, infrastructure and natural resources funds. In January it bought a stake in the 2006-vintage, €4.64-billion Macquarie European Infrastructure Fund II.
Law firm Dechert has re-hired a New York-based secondaries professional as a partner.
Timothy Clark, who rejoins the firm from O'Melveny & Myers, will represent clients in matters related to secondaries transactions and fund formation across infrastructure, buyouts, real estate, mezzanine and other types of private fund, according to a statement.
One of the secondaries deals he led saw him represent a large pension plan in the sale of a $1 billion portfolio of private equity interests, according to his biography on O'Melveny & Myers' website.
“Our global strength across the entire investment management spectrum is a continued attraction for both clients and laterals and we are thrilled to have Tim rejoin,” said Gus Black, co-chair of Dechert’s financial services practice and global head of private funds.
Dechert has been expanding its private equity offering in recent years with hires in New York, London, Beijing, Hong Kong and Singapore. It has more than 250 lawyers working on private funds, transactions and exits, according to the statement.
Read Dechert's Matthew Kerfoot, Jay Alicandri and Russel Perkins's discussion of the key issues that can arise when structuring and negotiating credit facilities here.
Hear that? That's the sound of champagne corks flying across bars and restaurants in London, New York, Hong Kong and Zurich as secondaries advisors celebrate a stellar year of deal volume.
And who can blame them? Transaction volume reached a record high last year with as much as $58 billion traded, according to estimates by Greenhill Cogent. The big shift, as our annual advisory firm survey showed, was towards GP-led deals.
With the exception of Greenhill Cogent and Elm Capital, GP-leds or direct deals – broadly defined as anything other than an LP initiating the sale of its stake in a fund – accounted for between 50 percent and 100 percent of each advisor’s work last year.
It's clear primary GPs are becoming increasingly comfortable with these deals. BC Partners’ head of investor relations management, Laura Coquis, said all primary GPs should consider secondaries, after her firm’s $1 billion stapled deal with Lexington Partners. Other high-profile managers such as Nordic Capital and Thomas H Lee Partners have either executed deals or are considering them, a sign there's more to come.
The GP-led side of the market has come a long way in a short period of time. When Secondaries Investor surveyed firms about their 2015 activity, just 20 percent of Evercore's deals were GP-leds, while now they're around 50 percent; Elm didn't work on any GP-leds in 2015 compared with the 18 percent it advised on last year; and almost three-quarters of Rede Partners' deals in 2015 were GP-leds, which increased to 100 percent last year.
In addition to our analysis of the results (which you can find here), three things that grabbed our attention are as follows:
1 Greenhill Cogent is still leader of the pack...
...in terms of deal volume, that is. The advisory firm worked on a whopping $11.9 billion worth of deals last year, 90 percent of which were LP stakes. The firm has not ignored the GP-led side of the market – it is understood to be advising on at least one GP-led deal in southern Europe.
2 Three firms advised on more than half of the market
Greenhill Cogent, Evercore and Park Hill advised on around $30 billion-worth of deals, a sign the largest advisors aren't ready to relinquish their share of the pie just yet.
3 Infrastructure took a back seat
When infrastructure deals close, they can be massive. Italian infrastructure fund manager F2i sealed a €3.1 billion first close on its third fund, seeding the new vehicle with assets from its maiden fund, and Ardian sold assets from its €1.1 billion AXA Infrastructure Fund II to APG and AXA in 2017. The asset class looks to have taken a slight dip last year: Campbell Lutyens was the only advisor to identify infrastructure specifically as an asset class it worked on, accounting for 19 percent of its deal volume, down from 35 percent in 2015.
How big can the GP-led part of the market get? Let us know: firstname.lastname@example.org or @adamtuyenle
Ashburton Investments, a South African investment manager, is seeking 1 billion rand ($85 million; €68 million) to acquire African fund stakes, Secondaries Investor has learned.
Ashburton Private Equity Fund II has a 35 percent allocation to sub-Saharan African assets outside South Africa and is likely to be underweight given the relative lack of opportunities, according to a source familiar with the fund. Fund II has a minimum investment of 10 million rand, compared with an average of 50 million rand for primary fund investments.
The fund, whose launch was announced in February with an unspecified target, will invest mainly in blue-chip, late-stage buyout funds as well as opportunistic co-investments. It is seeking double-digit returns and is set to hit a first close in June.
The firm declined to comment on fundraising.
Ashburton's 2014-vintage Ashburton Private Equity Fund I had target allocations split equally between primaries, secondaries and co-investments. The fund ended up being heavily overweight to secondaries, which encouraged the creation of a dedicated secondaries follow-up, Secondaries Investor understands.
That fund is nearly 90 percent deployed across six fund managers and 27 portfolio companies.
Johannesburg-headquartered Ashburton had 140 billion rand in assets under management as of the end of 2016, according to its website. It is a subsidiary of FirstRand Group, one of South Africa's largest financial services conglomerates.
In March 2016, then-head of Credit Suisse's secondaries advisory team Mark McDonald and Henry Watson, an associate in the private funds group, wrote that Africa was a good market for secondaries investors due to the lack of competition.
"Given that the majority of the money invested in African private equity comes from experienced institutional investors that have been involved in the asset class since the 1990s and are au fait with secondaries processes, the secondaries market in Africa should develop much more quickly than it did in North America and Europe," they added.
Private Advisors has held the final close on its latest secondaries fund after 20 months in the market.
The oversubscribed Private Advisors Secondary Fund V hit its hard-cap of $275 million, the firm said in a statement, exceeding its target of $200 million. It will invest in small single fund interests and structured deals and has a maximum deal size of $25 million.
Investors in the fund include pension plans, endowments, foundations, family offices and private banks.
The fund formally launched with outside investors in June 2016. By December 2017 commitments to the fund totalled $197.8 million, Secondaries Investor understands. New Jersey-based NYLIFE Distributors and New York-based Berchwood Partners acted as placement agents, according to a filing with the Securities and Exchange Commission.
Chris Stringer, president of Private Advisors, said: “There have been significant inflows to mega secondaries funds, while small market flows have remained relatively consistent. This fund is focused on small transactions and, more specifically, on opportunities where our broad platform and collective experience in the small company market can provide a sourcing or information edge."
Private Advisors expanded into secondaries in 2012 through the acquisition of Cleveland-based Cuyahoga Capital Partners’ investment advisory business. It took over the responsibility of investing Cuyahoga Capital Partners IV, a $134.8 million secondaries fund.
Fund V is the first secondaries fund the firm has raised since the acquisition.
Private Advisors was founded in 1997 by Lou Moelchert, the former chief investment officer of the University of Richmond Endowment Fund. The firm has $4.6 billion in assets under management across private equity, secondaries, real assets, opportunistic and special situations credit and long/short equity, according to its website.
Secondaries advisory activity shifted heavily towards GP-led deals last year with these transactions accounting for the bulk of deal volume for most intermediaries, according to Secondaries Investor's annual survey.
Evercore, Campbell Lutyens, Lazard, Credit Suisse and Axon Partners saw GP-led or directs transactions comprise between 50-76 percent of their deals. All of Rede Partners' deals were GP-led transactions.
"There is an increasing receptiveness of GPs, including highly successful GPs, to explore opportunities at this end," Yaron Zafir, Rede's head of secondaries and GP-led transactions, told Secondaries Investor. "At the same time LPs themselves increasingly understand the benefits of GPs leading with such initiatives and are generally less suspicious of them than they have been in the past."
Greenhill Cogent, Evercore and Park Hill accounted for more than half of last year's roughly $58 billion in deal volume. Greenhill Cogent worked on $11.9 billion across 62 transactions, Evercore on $10.1 billion across 42 deals and Park Hill on $8 billion across 25 transactions.
Deal volume was defined as purchase price plus unfunded commitments for transactions that closed between January and December, and data was submitted by advisors.
Campbell Lutyens, which advised on some of last year's largest GP-led deals such as BC Partners' $1 billion stapled deal with Lexington Partners, worked on $6.9 billion worth of deals across 14 transactions. Infrastructure accounted for almost 20 percent of its deals by asset class.
Firms continued to work on an increasingly diverse range of asset classes. Around a quarter of Credit Suisse's more than $3 billion-worth of deals were real assets or other. The firm advised on 16 transactions.
Rede's more than €500 million-worth of deals comprised 35 percent growth and venture, 18 percent mezzanine and the remainder buyout.
Lazard, which worked on around €5 billion worth of deals, had around half of its 17 transactions by number involving growth, venture or real estate funds.
The make-up of sellers also evolved last year, according to Lazard.
"We noticed a broadening of the type of financial sponsors involved in secondary transactions from those who had not raised a fund since the financial crisis towards those who had raised at least one," Lazard noted.
Greenhill Cogent and London-based Elm Capital were the only two firms for which LP positions comprised a majority of deal volume, at 90 percent and 82 percent respectively. Elm, which advised on $1.5 billion worth of transactions across 25 deals, said it saw a "very large number of tail-end sales by funds of funds".
Switzerland's Axon Partners advised on €500 million worth of GP-led deals and €158 million-worth of LP stakes.
Firms including Triago, Cebile Capital, UBS, Setter Capital and Mercury Capital Advisors either declined to participate in the survey or did not return requests for comment.
Stay tuned for our law firm secondaries advisory survey in the coming week.
The Maryland State Retirement and Pension System, which has around $50 billion in assets under management, is seeking an advisor to help it carry out a secondaries sale.
According to a request for information published on its website, the pension wants the advisor to "help determine which assets to sell, the expected valuation of those assets on the secondary market, the optimal structure for the sale and a go to market strategy that would maximise value".
The pension gives no specific reason for wanting to sell.
To be considered, an advisor must have at least five years' experience advising governmental pension plans or similar institutional investors in secondaries sales. It must also have "evaluated, structured, and executed" secondaries sales in excess of $1 billion in value.
Submissions are due on 20 April. It is not clear when an advisor will be chosen.
Maryland has 198 individual private equity holdings valued at $5.7 billion, according to a list of private equity assets attached to the RFI. Some of its largest holdings are in Apollo IX ($270 million), MD Asia Investors II ($250 million) and Vista Equity Partners VI ($200 million).
It is a regular investor in the secondaries funds of Partners Group, Landmark Partners and Lexington Partners, the document revealed. It has also invested $300 million in Lexington Co-Investment Partners IV, a 2016-vintage side-vehicle.
Maryland is the latest in a succession of US public pensions to seek a secondaries sale in recent months. In January, Secondaries Investor revealed that Alaska Permanent Fund had hired Evercore to help it offload a portfolio of private equity stakes worth around $1 billion.
In February, Los Angeles County Employees Retirement Association announced that it was seeking an advisor to help it sell up to $1.4 billion of stakes. The advisor chosen in that process will be announced on 15 June.
Nearly a thousand pension managers, trustees and advisors were in Edinburgh last week for the Pensions and Lifetime Savings Association Investment Conference.
It came at a time when the amount invested in alternatives by UK pensions is on the rise. The average allocation by UK pensions to alternatives was 22 percent in 2017, according to consultancy Mercer's European Asset Allocation Survey, compared to just 4 percent in 2008.
Although many of the pension fund managers, trustees and advisors who attended the conference emphasised the need to invest in alternatives to increase returns, most viewed private equity as one of the least attractive illiquid asset classes. Here are some of the main reasons why.
Iliquidity and the changing needs of the investor
The longstanding issue of liquidity raised its head repeatedly. The move from defined benefit pensions towards defined contribution schemes means that individuals now have to receive daily pricing. According to one trustee of a London pension fund, whose fund has some investments in real estate but none in private equity, many don't want to lock their cash away for the long haul and are less willing to put up with the J-curve that characterises the early years of a private equity fund's life. While most of those were familiar with the secondaries market, none viewed it as an easily accessible way of freeing up liquidity.
Despite efforts by limited partners, private equity managers and regulators, the word 'opaque' was frequently used by conference delegates to describe the private equity industry. Hidden fees and a lack of transparency over the financial engineering carried out on portfolio companies were two commonly cited problems. One pensions advisor and executive board member zoned in on deceptively worded clawback clauses, which in her view fail to stop fund managers accruing more than their fair share of fees.
"Many trustees are not clued up enough to see they're being shafted by PE... A lot of investment advisors are clueless as well," she said.
Other alternatives fill the gap
Growing numbers of UK pension funds are cashflow negative – the pension payments they have to make outweigh the employee contributions they receive. For many the priority is to diversify to generate returns but to do so in a way that guarantees cashflow. Asset classes such as real estate, private debt and infrastructure may require pensions to lock away cash for the long haul, but the steady income they bring offsets the liquidity concerns that affect private equity, according to one director of defined contribution schemes at a global asset manager.
Pension pooling has created uncertainty around alternatives
The big story in the UK pension industry over the past few years has been pension pooling – the merging of the UK's 89 local government pension schemes into eight regional schemes to improve transparency and reduce costs. The process is in motion but there are still questions about how alternatives fit into these new structures.
In April 2017 the Local Pension Partnership, an amalgamation of the London Pensions Fund Authority and Lancashire County Pension Fund, set up a £1.8 billion ($2.5 billion; €2 billion) private equity pool, giving some idea of how this might be done. According to one trustee of a London fund, other pension schemes will want to see how well such forerunners go before making further investments in asset classes such as private equity.
PineBridge Investments has held the final close on its fourth dedicated secondaries fund after around 21 months of fundraising.
The New York-headquartered private markets firm amassed $568 million for PineBridge Secondary Partners IV, above its $500 million target, according to a statement.
“Since the beginning of our secondary programme, we have benefited from our global platform in order to source small to mid-market transactions, while staying true to both our value orientation and disciplined underwriting approach for assessing risk and return,” said Steven Costabile, managing director and global head of PineBridge's private funds group.
PSP IV will focus on small- to mid-sized, globally diversified transactions in developed and emerging markets, the statement said.
The fund's investor base spans the Americas, Asia, Europe and the Middle East and includes pension plans, insurers, family offices and financial services organisations. LPs which have committed to the fund include US foundation Elise P Hunt Trust, according to PEI data.
TopCap Partners is listed as having advised on the fund, according to a Securities and Exchange Commission filing detailing the final close.
PineBridge's predecessor secondaries vehicle, PineBridge Secondary Partners III, closed below its $500 million target on $308 million after around 20 months of fundraising, according to PEI data.
PineBridge had $85.3 billion in assets under management as of 31 December.
Investor sentiment towards secondaries improved slightly in an H1 2018 survey by advisor and placement agent Rede Partners compared with the second half of last year.
The firm's H2 Liquidity Index puts investor sentiment toward secondaries at 45 on a scale where no change in sentiment is equivalent to 50, a more positive sentiment scores above 50 and less positive sentiment below.
The latest figure is up slightly on the 43 recorded in the second half of last year, and down on the 52 recorded in the first half of 2017, suggesting that LPs expect to commit slightly less to secondaries in the 12 months ahead.
Rede puts this down to the record amounts raised for the strategy in 2016 and 2017, $29 billion and $38 billion, respectively.
Dry powder in the secondaries market stood at $125 billion at the end of last year and is likely to increase as buyer demand grows, according to advisor Greenhill Cogent.
There was a notable regional disparity in Rede's findings with respondents from Benelux, the Nordic region and Canada all expecting to increase their deployments to secondaries this year. Conversely, sentiment towards the strategy from UK investors has fallen to 35, compared with 70 in the first half of 2017.
Sentiment has declined among funds of funds – the main provider of liquidity to secondaries funds – to 64 from 73 between the last half of 2017 and the first half of 2018. It has increased among pension funds, insurance companies and endowments.
Overall, 95 percent of respondents said they expected to maintain or increase the amount of capital they allocated to private equity in the year ahead.
The Liquidity Index had participation from 165 LPs representing more than €6 trillion in assets under management and €1 trillion allocated to private equity, the report noted.
The phrase ‘captive team’ evokes images of suited inmates, trapped in some boiler room, condemned to buy and sell companies to the sole financial benefit of their institutional overlord.
The reality, of course, is rather different, but there often comes a time when a private equity team grows too big for its cage and feels the need to spread its wings, making spinning out an appealing course of action.
The most recent high-profile example came last July, when the secondaries team at Deutsche Bank Asset Management, led by Carlo Pirzio-Biroli, Charles Smith, Adam Graev, Chi Cheung and Deirdre Davies, spun out to become Glendower Capital. The firm initially managed the $3 billion of assets it raised at Deutsche on behalf of its former parent, but is set to start raising a fund of its own imminently.
In November, Private Equity International reported that Standard Chartered Private Equity, whose assets are primarily in Asia and Africa, had renewed plans to spin off from its parent and hired Credit Suisse to help it. The firm, which also manages around $3 billion in assets, is expecting to finalise the spinout in 2018.
The desire to spin out doesn’t always come from the team itself. Since the financial crisis many have been driven by the regulatory need for banks to reduce their exposure to illiquid assets. At the same time, banks have a long history of building up private equity capabilities one day and deciding the next that they’re no longer a ‘core’ part of the business.
But if a team does want to spin out, how do they go about it? And what are the potential pitfalls?
A common theme is that making the business case is the easy part. No matter how much a team might want to branch out on its own, nothing can happen unless their interests are aligned with the parent, creating impetus on both sides. If a team is able to clearly communicate this rationale with its LPs (if they have them), then it’s a solid start.
The main difficulty comes in putting the administrative machine together and getting all the cogs to move at the same time – and in the case of a big investment bank or asset manager, there are a lot of cogs. “It takes a week to narrow down a term sheet,” says Glendower’s Pirzio-Biroli. “But the devil is in the details.”
In the case of Glendower and Deutsche Bank, it meant gaining approval from multiple boards internally, as well as legal, compliance, accounting and tax, all under the watchful eye of regulators from three jurisdictions: the UK, US and Germany. In Pirzio-Biroli’s view, his team’s institutional knowledge and a sympathetic ear inside the organisation made all the difference.
“Having been reputable old timers with the bank was critical in being seen as credible counterparts when the bank started to review options,” he says. “As a result discussions were rapid, pragmatic and amicable in nature.”
If a team is fully captive – all its funding comes from the parent – finding the right investors is integral to successfully spinning out. One partner, who was with a firm that spun out in the mid-2000s, suggested keeping the number to a minimum if you possibly can; negotiations are complex enough with one or two backers. The search for investors also serves as an opportunity to look at your own portfolio with an objective eye before negative signals from the market knock you off your perch.
“What is the realistic value of the portfolio today and what will it be in two years’ time? Are these realistic numbers or are they overbaked?” says the partner.
Like so much in life and business, the most important component is people. A spin-out can take years to complete, and morale can’t stay up that whole time unless the process has favourable consequences for every team member, not just a few.
Graham Thomas became chief executive of Stage Capital in 2015, to help it spin out from National Bank of Greece with around €300 million in assets. In a pleasing bit of symmetry, he was brought in by investors Goldman Sachs and Deutsche Bank, the team that later became Glendower Capital.
“Have a hard look at your team and decide who you really need and who you don’t,” he tells PEI. “You’ve got one shot at getting your team right. Make sure you don’t take passengers. Invariably in banks and in slightly less professional private equity operators that might be in-house, there’s an accumulation of people that aren’t necessarily the team you need to take things forward.”
The financial distress and regulatory obligation that drove spin-outs in the wake of the financial crisis has dissipated considerably. But there are still plenty of teams wondering what they could achieve if they opened the door to the cage and stepped outside.
Five spin-outs of note
In February 2009, a HarbourVest-backed management group helped spin out the venture capital arm of Lehman Brothers after the investment bank went bankrupt. It bought the parent’s existing investments and unfunded commitments. In 2012 the firm, now called Tenaya Capital, raised $372 million for its first independently raised fund.
Equistone Partners Europe
Equistone Partners Europe came into being in 2011 when its management team, led by Guillaume Jacqeau, spun the business out from Barclays. The firm raised its first post-Barclays fund in 2013, collecting €1.5 billion for EPEF IV. The management buyout was one of many driven by post-crisis capital requirements which drove the divestment of illiquids.
So big has Ardian grown that it’s easy to forget that it only spun out in 2013. The deal, valued at €510 million at the time of its announcement in March, saw what was then known as AXA Private Equity peel away from AXA Group, the insurance giant. The management team, led by Dominique Senequier, took a 46 percent stake in the new business.
One Equity Partners
One Equity Partners spun out from JPMorgan in 2015 by way of a stapled transaction. Secondaries buyer Lexington Partners bought a large chunk of the firm’s portfolio and committed $500 million for the firm to invest as a standalone entity. It closed its first standalone fund in 2015 on $1.65 billion.
The RBS spin-out Pollen Street was in the news in February as it closed its first post-spin-out fund on £402 million ($555 million; €452 million), having held a first close back in March 2016.The financial-services-focused manager first struck out on its own in 2015 at the second time of asking, the parent rejecting its first attempt.
Ant Capital Partners has returned to market with its latest secondaries fund and has already raised around half its target, Secondaries Investor has learned.
The Tokyo-headquartered private equity firm held a first close on around $70 million for Bridge No.5-B Private Equity Secondary Investment Fund in February, according to managing partner Takao Akaogi.
The fund launched in December with a ¥15 billion ($141 million; €114 million) target and a ¥20 billion hard-cap. It will solely invest in LP stakes and will be global in reach, Akaogi said.
The rapid deployment pace of the predecessor secondaries fund, Ant Bridge 4 Private Equity Secondary Investment Fund, meant that Ant decided to begin fundraising for Fund 5-B quickly, focusing on re-ups from existing investors, Akaogi said. Ant Bridge 4 is a ¥27 billion 2014-vintage that comprises a direct secondaries vehicle and an LP secondaries vehicle.
Bridge No.5-B's limited partners will include Japanese corporate pension funds, university endowments and asset management firms.
Ant plans to begin raising a direct secondaries fund, Bridge No.5-A, in the second half of this year, Akaogi added. There are many situations in Japan where holders of direct minority stakes in companies need liquidity for reasons such as succession issues at family-owned businesses, he said.
Asian secondaries hit a record high last year with around $3.9 billion in deal volume, a 63 percent year-on-year increase, according to data from Greenhill Cogent. The region accounted for around 7 percent of the global total.
Ant Capital was established in 2000 and invests in secondaries, buyouts and venture capital, according to PEI data. It has an office in Hong Kong in addition to its Tokyo headquarters.
Older tail-end funds are delivering shrinking returns and should be sold, according to NYPPEX Private Markets.
Funds of 13-15 years in age generated an annual return of -0.24 percent in the 12 months to 30 September, according to a February report by the intermediary. This compares with returns of 4.43 percent for funds of between seven and 12 years of age.
Private equity funds aged 12 or older accounted for 33 percent of unrealised value worldwide as of the end of the third quarter, according to NYPPEX's analysis of 3,420 private equity funds of 2001-17 vintage.
"In general, as private equity funds extend terms, annual returns decline to investors," said chief executive Larry Allen.
The report concludes that investors can gain 1,200 basis points in annual returns by selling funds older than 13 years and reinvesting in assets of between one and six years in age, which are returning an average of 11.9 percent per year.
Separately, advisory firm Elm Capital said that 56 percent of the deals it worked on last years were sales of tail-end stakes, as sellers took advantage of the high pricing environment to generate liquidity from older assets.
Funds of funds drove the sell-off, accounting for 48 percent of all secondaries sales by seller type. Unlike in previous years, when portfolios sold by funds of funds were dominated by older vintages, sellers included newer funds last year, helping boost the value of portfolios on the secondaries market.
"These portfolios have typically comprised some attractive industry names allowing the funds of funds to both de-risk their more recent vintage vehicles and to secure attractive IRRs in respect of individual vehicles' hurdle rates," Elm noted in its report.
Tail-end secondaries were traditionally the preserve of a few firms, such as Blackstone's Strategic Partners and Hollyport Capital, which in October held a $500 million final close on its sixth fund dedicated to small tail-end stakes.
A growing numbers of buyers have become involved in the strategy in recent years, driven by high amounts of dry powder and considerable unrealised net asset value in older funds. Coller Capital estimates that there is $313 billion left in funds from vintage years 1999-2006.
A Partners Group secondaries professional who featured in Secondaries Investor's Young Guns of Secondaries Class of 2017 has left to join HQ Capital.
Kevin Nowaskey takes the title of vice-president at the firm and will be based in New York, according to his LinkedIn profile. It is understood his first day will be 19 March and he will work across secondaries and global fundraising efforts, reporting to managing directors Christian Munafo, Chris Lawrence and Tim Brody.
Nowaskey was most recently an assistant vice-president at Partners and ranked eighth in last year's Young Guns of Secondaries list of the most influential professionals under 36. As of September he had worked on more than 70 LP portfolio deals, eight fund restructurings, 11 direct secondaries transactions and three co-investments, closing at least $1.2 billion in the three years since he joined Partners.
He had originated around $1 billion of secondaries dealflow during that time, as Secondaries Investor reported.
HQ Capital, the rebrand of Auda International and HQ Group’s real estate and buyout businesses in 2015, is raising Auda Secondary Fund IV, according to PEI data. The fund launched in October 2015 and is seeking $400 million.
The firm, which also manages funds of funds, mezzanine, distressed and venture capital funds, has $11.9 billion in assets under management, according to PEI data.
– Adam Le contributed to this report.
– This story was updated to show Nowaskey will focus on secondaries and global fundraising efforts.
GP-led transactions stole the spotlight in the secondaries market in 2017 and the bulk of the activity took place in Europe.
Deal volume for GP-leds in 2017 was $14 billion, almost 25 percent of the market, according to data from Greenhill. The advisory firm noted in its annual report that European GPs drove volume, accounting for 48 percent of GP-led market share compared with 40 percent in North America.
Evolution in secondaries transactions has typically come from North America, where the vast majority of deals, 66 percent last year, are taking place. European activity accounted for only 22 percent of secondaries in 2017.
The relative lack of GP-led activity in North America is not for lack of potential dealflow, noted Greenhill: there is a significant pipeline of suitable funds that could come to market in the next 12 to 24 months, the advisor said.
Three reasons could explain the current Euro-centric market:
- The continent’s public markets have lagged their US counterparts
US stock markets rose significantly in 2017, with the S&P500, NASDAQ and Dow Jones Industrial Average returning 19 percent, 27 percent and 24 percent respectively.
In Europe, growth was less than half of that in the US, with the FTSE 100, France’s CAC 40 and the DAX increasing by 8 percent, 12.5 percent and 12.5 percent respectively.
Vibrant public markets in the US not only offered an exit route to GPs but also boosted portfolio companies’ valuations, making it less pressing to offer liquidity to limited partners.
- European GPs have a greater need to crystallise carry
The European waterfall model favours back-ended carried interest, after investors have had all capital commitments back together with their preferred return. The American model allows GPs to receive carry on a deal-by-deal basis.
With US GPs pocketing some of the carried interest earlier in the life of the fund, they may be less incentivised to proceed to a GP-led transaction to accelerate exits.
“If you’re a US manager, obviously there’s still a lot of benefits to you but the deal-by-deal waterfall makes it a little different because your risk is isolated on a company-by-company basis,” a lawyer said.
“In Europe, if I have four or five companies left, to get back over the hurdle I’m going to have to sell two or three of them before I get into carry. But if you do a fund restructuring, you can sell all four companies at the same time. That means I get to lock that value in now, for purpose of the waterfall, and I can say on a bundled basis I am offering a sale to my LPs. That fact is partially what’s driving […] more of these deals by healthy GPs in Europe.”
- US regulators are watching GP-led restructurings closely
In the past couple of years, the Securities and Exchange Commission has been vocal about scrutinising GP-led restructurings and deals involving a staple component.
There’s a worry GPs seeking staples as part of a secondaries sale aren’t fulfilling their fiduciary duty but putting the interests of the firm and raising the next fund before that of existing LPs, we wrote in 2015.
Several market participants tell Secondaries Investor the SEC has looked at nearly all American GP-leds since then to make sure the deals are fair to LPs.
A secondaries advisor tells us that scrutiny may be deterring some GPs. He added it may also be why tender offers and asset strip sales have predominated. These deals tend to be smaller in size and may not be enough to boost volume on their own.
Do you anticipate US GP-led transactions will pick up in the in 2018? What would trigger an increase in volume? Tell us at: email@example.com
Strategic Partners has emerged as one of the buyers set to acquire a portfolio of stakes from Liberty Mutual Insurance, the US's fourth-largest property and casualty insurers, Secondaries Investor has learned.
The Blackstone unit is part of a consortium of buyers who will acquire private equity stakes worth more than $1 billion in a process run by Park Hill, according to two sources familiar with the deal. The identity of the other buyers is unclear.
Strategic Partners has signed a sales and purchase agreement for the portfolio, according to one of the sources. Both sources said the deal is yet to formally close.
It is understood the portfolio contains two large positions in Blackstone Tactical Opportunities funds. It is unclear which of these funds are included in the portfolio.
Strategic Partners is investing out of its $7.5 billion Strategic Partners Fund VII which closed above its $5.75 billion target in January 2017, according to PEI data.
The fund makes opportunistic secondaries investments of between $100,000 and $1 billion-plus, focusing on mature portfolios that are fully or near fully invested, as Secondaries Investor reported.
Boston-headquartered Liberty had $70.7 billion in invested assets as of 31 December, according to its latest earnings results. The insurer invests into buyout, mezzanine, distressed and venture capital strategies and has made commitments to secondaries funds including Coller Capital and Fondinvest vehicles, according to PEI data.
Strategic Partners and Park Hill declined to comment. Liberty did not return requests for comment.
Nordic Capital has executed the largest-ever GP-led restructuring with Coller Capital and Goldman Sachs Asset Management.
Coller and Goldman will acquire around €1.5 billion worth of net asset value held in the Scandinavian buyout firm's 2008-vintage Nordic Capital VII fund after around 60 percent of LPs by value decided to sell their exposure on Monday, according to two sources familiar with the deal.
The nine assets held in Fund VII will be moved into a five-year continuation fund which is backed by Coller, Goldman and the remaining roughly 40 percent of LPs by value who decided to roll over their exposure, one of the sources said.
It is understood that Coller will account for around 70 percent of the secondaries capital, and Goldman the remainder. The pair are paying an 11 percent premium to NAV. It is unclear which valuation date the deal is based on.
LPs who decided to roll over their exposure have been broadly offered the same terms as they had in the existing vehicle, according to one of the sources. More than 80 percent of LPs by value approved of the proposal going ahead, the source added.
The deal is expected to formally close in April.
With around €1.5 billion trading in NAV, the Nordic deal is almost twice the size of Peruvian private equity firm Enfoca Investments' restructuring of two of its funds, which was the largest GP-led transaction announced this year. That deal involved around $950 million in capital commitments.
Nordic Capital, one of Scandinavia's largest buyout firms, began discussions with LPs to restructure its Fund VII in September due to a difference in motivations in the vehicle’s LP base, as Secondaries Investor reported in September. Some LPs wanted to exit their investment as the fund had reached the end of its life, while others wanted to remain in the vehicle to keep their allocations up and allow more time to realise the remaining value in the portfolio, a source said at the time.
The firm hired Campbell Lutyens to advise on the potential process. In January Coller emerged as the preferred buyer, as Secondaries Investor reported.
The process attracted criticism from some LPs after investors were given a 20-business-day deadline by which to read a thousand-page document regarding the proposal and decide whether to sell or keep their exposure.
Assets in Fund VII include disabled and elderly mobility solutions provider Sunrise Medical and Norwegian offshore energy service company Master Marine, according to Nordic’s website.
LPs in Fund VII include Pennsylvania Public School Employees’ Retirement System, Washington State Investment Board and Ireland Strategic Investment Fund, according to PEI data.
Nordic is raising its ninth flagship fund with a €3.5 billion target and was understood to be nearing the final close as of mid-February.
Nordic, Campbell Lutyens and Coller declined to comment. Goldman did not return requests for comment by press time.
– Toby Mitchenall contributed to this report.
Austin Fire Fighters Relief & Retirement System has committed to Partners Group's latest real estate secondaries fund as part an effort to re-balance its portfolio.
According to minutes from the pension's January meeting, treasurer Art Alfaro motioned a $15 million commitment to Partners Group Real Estate Secondary 2017. The motion was unanimously agreed by the board.
The commitment came after consultant Meketa Investment Group recommended the pension increase its exposure to non-core real estate, according to the minutes. Partners Group, Landmark Partners and direct investment firm Crow Holdings Capital were listed as the top three candidates to help it achieve this.
Austin has 23 percent of its portfolio exposed to private equity and 8 percent to real estate, according to data from Private Equity International, compared with target allocations of 15 percent and 10 percent.
The pension has made private equity secondaries investments before, most recently in Deutsche Bank Asset Management's $1.65 billion third fund, which is now advised by Glendower Capital.
Partners' latest real estate secondaries fund launched in October 2016 and is seeking €2 billion, according to data from sister publication PERE. The fund had raised €1.2 billion as of August from investors including El Paso Firemen and Policemen's Pension and East Riding of Yorkshire County Council Pension Fund, as Secondaries Investor reported.
Landmark is also in market with its eighth real estate secondaries fund. The firm is seeking $2 billion and exceeded the target in December, 14 months after launching the vehicle.
Evercore has promoted three secondaries professionals, including a 2016 Secondaries Investor Young Guns finalist.
[caption id="attachment_15364" align="alignleft" width="180"] Dale Addeo[/caption]
The advisory firm promoted Dale Addeo to managing director, according to a spokesman. New York-based Addeo joined the firm in 2013 from UBS after Nigel Dawn and Nicolas Lanel left the Swiss investment bank to set up Evercore's secondaries advisory team.
Addeo ranked 11th in the Young Guns of Secondaries list of the most impressive professionals in the industry under 36 in 2016. He has worked on deals including the restructuring of Veronis Suhler Stevenson and Health Evolution Partners funds.
In London, Evercore promoted Francesca Paveri and Jasmine Hunet to director. Both were previously vice-presidents and also joined in 2013 from UBS.
The promotions were effective 1 March.
Evercore has 33 members in its private capital advisory focusing on secondaries, according to the spokesman.
At a panel on restructurings at Goodwin's New York office, two lawyers described the decisions, structures and negotiations behind a 2005-vintage GP-led restructuring they worked on.
Starting the process
The Goodwin-advised vehicle had most of its value concentrated in a single asset, with the general partner in carry but no longer earning a management fee. While the fund no longer required additional capital, the manager wanted to buy more time for the asset, which needed three or four years to reach its full potential. Through a secondaries deal, the GP also hoped to start earning a management fee again, as well as collect capital for its next fund.
The asset-level deal took about eight months from start to finish. In the first five months, the GP hired an intermediary to shop the deal. Out of 120 identified potential buyers, the advisor narrowed the list to 26 buyers. After opening up access to its deal room, the GP received seven bids and selected the winner based on a high – but not the highest – bid and the buyer’s ability to take on the entire deal.
The GP spent the next three months negotiating the deal, including a new waterfall, governance and partnership agreements. One the buyer and the seller agreed on terms, LPs had 20 days, which Goodwin noted was a relatively short period of time compared with other negotiations, to decide if they wanted to take part in the secondaries deal or sell their interests and exit the structure.
The make-up of the LP base has a significant effect on the success of GP-led deals, according to Phil Tsai, global head of secondaries market advisory at UBS, who also spoke at the panel.
"We like when there are six to eight LPs that make up the majority of the fund versus 30 plus. Those things matter – it's like herding cats if there are too many because it increases the risk you won't get to the necessary approval and selling thresholds."
Structurally, the deal involved four steps. First, the GP rolled its portfolio companies into a new vehicle. Next, the fund distributed new vehicle interests to the LPs and GPs from the original fund. Thirdly, the new LPs contribute the cash to the new vehicle, and finally, the LPs and the GP of that new fund have the option to redeem their interests in the new company.
LPs could exit the new structure entirely, or if they wanted to stay in the new vehicle, they had two options: they could retain the old vehicle’s fee structures or they could have the same terms for the new vehicle as the secondary buyer. This last option would give them a lower waterfall but would reinstate the management fee, an option few LPs opted into. One Goodwin lawyer said the GP gave LPs three options to address concerns from the Securities and Exchange Commission, and ensure that LPs are not forced into a deal.
“That’s why we gave the LPs the option to go in on the same terms,” the lawyer said.
The secondaries buyer also committed capital to the GP’s new fund.
The secondaries deal was successful for all sides, a Goodwin lawyer said, because the GP sealed a capital commitment for its next fund and extended its value-creating opportunities from the previous vehicle, while the LPs could either realise their capital or take part in additional value generation.
[caption id="attachment_23815" align="alignleft" width="180"] Heidi Rediker-Crebo[/caption]
Campbell Lutyens has appointed Heidi Crebo-Rediker, the chief executive of international capital strategies at influential US think tank the Council on Foreign Relations, to its global advisory board.
Before her think tank role, Crebo-Rediker was the US State Department’s first chief economist and before this was chief of international finance and economics for the Senate Committee on Foreign Relations. Her US government roles came after nearly two decades in Europe as a senior investment banker, covering emerging and developed markets.
“We recognise the need to continually bring new perspectives to our business," Gordon Bajnai, chairman of Campbell Lutyens’ global advisory board, said in a statement announcing Crebo-Rediker's appointment. Her experience advising at the highest levels of US government and her understanding of emerging markets and the infrastructure sector will be valuable to Campbell Lutyens' US expansion, he added.
The hire is the latest in a string of high-profile appointments for the London-headquartered advisory firm and placement agent. Bajnai, the former prime minister of Hungary, joined in April, followed by a trio of hires: Sir Peter Westmacott, the former British Ambassador to the US; Wayne Kozun, the former senior vice-president of Ontario Teachers’ Pension Plan and Teh Kok Peng, the former president and deputy managing director at Singapore's GIC Special Investments.
The firm has more than 30 staff in the US, advising on both primary fund placement and secondaries transactions across private equity, infrastructure and private debt.
[caption id="attachment_23804" align="alignleft" width="212"] Philippe Roesch[/caption]
RIAM Alternative Investments provides private equity investment advisory and management services to family offices and institutional investors. The Frankfurt-based fund's managing partner Philippe Roesch speaks to Secondaries Investor about potential declining returns in secondaries and LPs' challenges in investing.
How does RIAM access the secondaries market?
We look for LP stakes in funds or funds of funds as well as direct portfolios of companies our clients could purchase. Some of our clients are also potential investors in secondaries funds.
The secondaries market has taken off in the last few years: do you think it will meet investors’ expectations?
It depends on which expectations we are speaking about: returns, duration, liquidity? I think that we might see declining returns due to high purchase prices at the peak of the cycle as well as longer durations and holdings in a market that will become more liquid and transparent.
[GP-led restructurings are] definitely a growing segment as GPs now take advantage of the secondaries market to manage their LP roundtables as well as fundraisings.
What type of manager does RIAM typically back?
We back top decile late-stage, growth and buyout fund managers in Europe and opportunistically in other geographies or with other investment focuses such as sector funds and distressed situations. We are looking for high and sustainable returns over a couple of fund generations and hands-on private equity managers.
Is it a challenge, as an LP, to invest in private equity at the moment?
Yes, as we feel that many segments of the private equity industry currently show an imbalance between capital inflows and capital deployment. Altogether, there is currently $1 trillion of dry powder available, especially in the areas of mega and large buyouts, infrastructure and generalist secondaries funds, among others.
What is your biggest current concern relating to private equity?
[There is] too much money in some segments of the market, too much regulation for smaller managers and many LPs.
Philippe Roesch has been with RIAM since 2011. He was previously head of private equity Europe at Auda Alternative Investments, now HQ Capital, where he generated primary and secondaries dealflow.
Industry Ventures, a VC-focused fund of funds and secondaries investment firm, has promoted two of its staff to principal.
The San Francisco-headquartered firm promoted Lindsay Sharma and Ira Simkhovitch, both on its secondaries investment team, according to a statement.
The pair have "demonstrated a strong ability to work with sellers of direct share positions in leading private technology companies as well as limited partnership interests in performing venture capital partnerships”, said Hans Swildens, Industry Ventures' chief executive and founder.
Sharma joined the firm in 2014 from business and financial software company Intuit, while Simkhovitch joined in the same year from AlpInvest Partners.
The firm is investing its $200 million fund of funds vehicle, Industry Ventures Partnership Holdings IV, which makes primary commitments and early secondaries purchases in smaller VC funds. It is also in market with Industry Ventures Partnership Holdings V which has a $250 million target, according to minutes from the New Hampshire Retirement System's 23 February independent investment committee meeting.
Industry Ventures' latest dedicated secondaries fund is its $500 million Industry Ventures Secondary VIII, which closed in 2016. The firm also uses a $200 million Special Opportunities fund which invests in larger deals alongside the main fund.
HarbourVest Partners has promoted three investment professionals focusing on secondaries amid a total of 16 appointments.
[caption id="attachment_23763" align="alignleft" width="180"] Valérie Handal[/caption]
The firm promoted Valérie Handal and Rajesh Senapati to managing director, according to a statement. London-based Handal joined the firm in 2006 and has worked on a range of deals including SVG Capital, 3i Ventures and RBS special situations, according to HarbourVest's website.
Boston-based Senapati, who joined the firm in 2005, played a lead role in the 2011 acquisition of Swiss-listed Absolute Private Equity as well as the 2012 acquisition of Conversus Capital's portfolio.
[caption id="attachment_23764" align="alignright" width="180"] Rajesh Senapati[/caption]
Also in Boston, the firm promoted Matt Souza to principal. Souza joined HarbourVest in 2005 and is involved in the analysis and monitoring of deals, portfolio construction and allocation of investment opportunities.
In London, Richard Hickman was promoted to principal. He joined in 2014 to focus on the firm's listed investment vehicle, HarbourVest Global Private Equity.
HarbourVest is investing its 2015-vintage Dover Street IX secondaries fund which closed on $4.8 billion, according to PEI data.
Secondaries Investor has collated a list for the last two years of the 20 professionals under the age of 36 who are defying their relative youth to drive the market forward: the Young Guns of Secondaries.
In late January members of the classes of 2016 and 2017 assembled at the offices of law firm Debevoise & Plimpton for an evening of networking that saw buyers, lawyers, advisors and finance providers swapping notes on the state of the market and the current crop of deals.
For more information on the rankings and the Young Guns on them, please see the 2017 and 2016 rolls of honour.
Click on any photo to launch the gallery.
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Secondaries transaction volume reached a new record last year - $58 billion - with the bulk of it concentrated in the sale of LP stakes.
GP-led transactions represented only about 30 percent of that but that corner of the secondaries market grabbed the attention in 2017, as the Private Equity International Awards, which were revealed on Thursday, reflected.
The winners for secondaries deal of the year for the Americas, EMEA and Asia were GP-led transactions, and two of the winners for secondaries advisor of the year worked on some of the most talked-about GP-leds of 2017.
The deals illustrated the innovation that secondaries buyers have embraced amid increasing competition.
Take the winner for secondaries deal of the year in the Americas. With the Clearlake Capital deal, Landmark Partners demonstrated it has adopted preferred equity as part of the secondaries toolkit in its purchase of Reservoir Capital’s 20 percent stake in Clearlake’s GP management company.
In Asia, the winning deal was the $1.2 billion strip of assets of Warburg Pincus’ Asia portfolio made up of 29 Asian companies. Lexington Partners was the majority buyer.
Such transactions clearly show that GP-led secondaries are not confined to firms in distress but have much to offer healthy firms which want to address portfolio management or changes at the management company level.
The PEI Awards results also reveal that a focus on innovative deals is paying off for advisors.
Lazard, which won secondaries advisor of the year in Asia, advised Warburg Pincus as well as the winning secondaries deal of the year in Europe, the restructuring of southern-Europe-focused Investindustrial’s 2008-vintage fund.
While the secondaries community has predicted the rise of GP-led transactions for several years, perhaps the most surprising development in 2017 was the fact that most GP-led deals occurred in Europe.
Campbell Lutyens, the winner of secondaries advisor of the year in EMEA, played a big part in the region’s influence, having advised on several transactions including a tender offer and staple with BC Partners and the ongoing process on Nordic Capital’s Fund VII.
Click HERE to read the full coverage of the annual PEI Awards.
SwanCap Partners has raised €433 million to invest in primaries, direct secondaries and co-investments, according to a statement from the firm.
Private Equity Opportunities Fund III SCS, also known as SWAN III, was targeting €400 million for mid-market investments in Europe and North America.
The fund held a €405 million second close in September, as Secondaries Investor reported.
KJustus Financial Services in Frankfurt and UniCredit Bank in Munich acted as placement agents, according to a US Securities and Exchange Commission filing announcing the close.
It is not clear how long the fund has been in the market, but its date of first sale is listed as 31 August 2016.
SWAN III has already made 20 deals across the three strategies, according to the statement, accounting for around 50 percent of its total.
The fund counts on commitments from large family offices, private and public pension plans, insurance companies, sovereign wealth funds and funds of funds, according to the statement.
SwanCap was founded in 2013 by senior members of UniCredit’s private equity unit and manages a significant portion of the Italian bank’s private equity portfolio, which it bought in early 2014.
It ranked 19th in Secondaries Investor‘s SI 30 last year – which lists the largest secondaries firms by capital raised over the past five years – having raised the equivalent of $2.2 billion since 1 January 2012.
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Secondaries deal of the year in Europe
- AlpInvest Partners,
Lazard for Investindustrial
- Lexington Partners and Campbell Lutyens for BC Partners
- Ardian, Campbell Lutyens for Mubadala
AlpInvest Partners and Landmark Partners were rewarded for their role in one of the more unusual secondaries deals of the year. It involved southern-Europe-focused Investindustrial raising a fund to buy €750 million of assets from its own 2008-vintage vehicle. Believing that there was still value in the fund the firm transferred six assets into the new vehicle, a move that effectively amounted to a 10-year extension on the original vehicle. It was partly a response to increased competition from sovereign wealth funds, who can leave assets to mature for longer. AlpInvest became the majority LP in the new fund, with Landmark also backing the process. The innovative structure was formulated by secondaries advisor Lazard.
Secondaries firm of the year in Europe
- HarbourVest Partners
- AlpInvest Partners
Ardian continues to tower over the rest of the secondaries market. According to the SI 30, an annual survey published by sister publication Secondaries Investor, Ardian raised $31.6 billion in the five years leading up to August 2017, compared with $16.8 billion for second-placed Blackstone. Last year saw it participate in the largest stapled deal of all time – a $2.5 billion transaction involving sovereign wealth fund Mubadala – and set in motion the launch of an $8 billion mature secondaries fund for the second half of 2018. It was also very active on the sell-side, offloading $1 billion of pre-crisis stakes to CPPIB and around $1.5 billion of stakes to Strategic Partners across two transactions.
Secondaries advisor of the year in Europe
- Campbell Lutyens
- Credit Suisse
Few have done as much to promote the use of GP-led transactions as Campbell Lutyens. While North America was big on volume, it was Europe that led the way on innovation, due in no small part to the secondaries advisor’s influence. In April, the firm worked on the largest-ever stapled secondaries transaction, a $2.5 billion deal involving Ardian’s 2015-vintage ASF VII fund and Abu Dhabi sovereign wealth fund Mubadala. Then in September, it managed a deal that saw BC Partners, one of Europe’s biggest private equity houses, run a process on its ninth fund and use a staple to help raise its €7 billion 10th fund, making it clear that GP-led processes are not just for those that are struggling. “We continue to see strong interest in the market in 2018, both in private equity and infrastructure opportunities, and we are focused on maintaining our flexible approach, working with both GPs and LPs across a wide range of mandates,” said partner Thomas Liaudet.
Law firm of the year in Europe (secondaries)
- Kirkland & Ellis
- Clifford Chance
In September 2016 Kirkland promoted Ted Cardos to partner and charged him with leading the firm’s secondaries operation in Europe. The firm had won that year’s award for best secondaries law firm in Europe, so the pressure was on to keep up the good work. The numbers speak for themselves. In 2017, Kirkland & Ellis advised on $963 million of European secondaries portfolio trades and more than €1 billion-worth of GP-led processes. Among the many deals it worked on was our European Secondaries Deal of the Year, the €750 million recapitalisation of Investindustrial’s 2008-vintage fund, which was backed by AlpInvest and Landmark. Kirkland has 250 dedicated investment funds lawyers, including 86 partners, across North America, Europe and Asia-Pacific.
READ THE SUCCESS STORIES
AlpInvest Partners, Ardian and Hong Kong’s TR Capital have been voted the best secondaries firms of the year in sister publication Private Equity International‘s 2017 Awards, announced on Thursday.
Readers chose the three firms in the Secondaries Firm of the Year categories across the Americas, EMEA and Asia-Pacific respectively, in PEI‘s annual industry poll.
AlpInvest raised $6.5 billion for its sixth secondaries programme, almost four-and-a-half times what it raised for its previous offering, cementing its position as a major secondaries player.
Ardian continues to tower above the rest of the market, driving dealflow on the buy- and sell-side. It was at the heart of some of the most interesting deals to take place in 2017, including a $2.5 billion transaction involving Abu Dhabi sovereign wealth fund Mubadala - the largest stapled deal yet.
TR Capital continues to break new ground in Asia-Pacific. It closed its third fund last year on $200 million and closed five deals, including its first Vietnamese LP stake acquisition and a couple of Indian fund restructurings, which are understood to have closed.
The deals category was extremely competitive, with InvestIndustrial's GP-led process taking the top prize in EMEA. The firm raised a fund to buy €750 million of assets from its own 2008-vintage vehicle, with backing from a group led by AlpInvest.
In the North America category preferred equity made a mark. The deal that came out on top was Landmark's backing of Clearlake Capital in its purchase of a stake in its own GP management company. Asian deal of the year was the sale of a strip of assets by Warburg Pincus, a $1.2 billion process that accounted for a sizeable chunk of the market last year.
Evercore, Campbell Lutyens and Lazard claimed the highly prized advisory awards in North America, Europe and Asia, respectively. And it was a clean sweep for Kirkland & Ellis in the legal category, as it came out on top on in all three regions for the second consecutive year.
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Secondaries firm of the year in the Americas
- AlpInvest Partners
- Landmark Partners
- Lexington Partners
Last year was a record one for secondaries fundraising and AlpInvest played no small part, hitting a $6.5 billion final close on its sixth secondaries programme. The $3.3 billion dedicated commingled secondaries vehicle AlpInvest Secondaries Fund VI was almost four-and-a-half times the size of its previous dedicated fund. The fund has committed to 12 transactions since it began deployment in September 2016, more than half of which were GP-led deals. “One of the biggest challenges was getting the AlpInvest brand known in the LP market,” the firm’s secondaries head Wouter Moerel told PEI in December. They know now.
Secondaries deal of the year in North America
- Landmark Partners for Clearlake Capital
- CPPIB, Evercore for Ardian portfolio sale
- Coller Capital and UBS for Avista Capital stapled deal
Preferred equity was a key theme in the secondaries market last year, with 17Capital raising more than €1 billion in record time and Whitehorse Liquidity Partners closing its debut fund above target on $400 million. Few secondaries generalists have embraced preferred equity as wholeheartedly as Landmark, with such deals accounting for nearly a quarter of invested capital from its 2008-vintage Fund XV. In April last year, the firm used the fund to help Clearlake Capital, a West Coast lower- and mid-market private equity firm, purchase Reservoir Capital’s stake in its own GP management company. The stake represented around a 20 percent stake in Clearlake, sister publication Secondaries Investor reported at the time. Around a third of voters threw their backing behind the deal.
Secondaries advisor of the year in the Americas
- Credit Suisse
- Park Hill
According to a report published by Evercore, 2017 saw record secondaries market transaction volumes of $54 billion, $17 billion up on 2016. The advisory firm itself helped a lot of that happen, proving to be among the busiest in North America last year. In March it helped Ardian offload a portfolio of more than $1 billion in pre-crisis stakes to Canada Pension Plan Investment Board. It also helped struggling Dallas Police and Fire Pension System execute multiple stake sales as it looked to generate cash flows from its illiquid portfolio. With a couple of big deals already in the pipeline, including Alaska Permanent Fund’s sale of $1 billion of stakes, 2018 is set to be just as busy.
Law firm of the year in North America (secondaries)
- Kirkland & Ellis
- Simpson Thacher & Bartlett
In North America, Kirkland & Ellis’s name pops up on many of the most prominent secondaries deals to have taken place last year. It worked on our American Deal of the Year, Clearlake’s acquisition, using preferred equity financing, of a stake in its own GP. It also dotted the i’s and crossed the t’s of the Warburg Pincus strip sale and the fund recapitalisations carried out by tech-focused PE firm Vector Capital. Michael Belsley, who leads Kirkland’s secondaries practice, said: “With respect to secondary transactions, Kirkland’s goal is not only to provide high-quality legal services to our clients, but to be a thought-leader in this market segment.”
In 2017, across all markets, Kirkland was involved in more than $12.9 billion of secondaries transactions, including 61 secondaries portfolio sales for an aggregate of $6.1 billion of transaction value.
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Secondaries firm of the year in Asia
- TR Capital
- HarbourVest Partners
- NewQuest Capital Partners
The Asian secondaries market has come a long way in recent years and last year accounted for around 8 percent of global deal volume by seller base, according to Evercore. Hong Kong-based TR Capital is one of the few secondaries firms making waves in this area. Highlights from last year include closing its third fund on $200 million and closing five deals, including its first Vietnamese LP stake acquisition and two Indian fund restructurings which are understood to have closed.
“As Asian investors become increasingly sophisticated, secondary investment is no longer a niche option,” said partner Frederic Azemard.
This is TR Capital’s second win in this category in a row – surely a sign we’ll be hearing more about the direct secondaries specialist in years to come.
Secondaries deal of the year in Asia
- Lexington Partners and Lazard for Warburg Pincus
- Temasek and Greenhill Cogent for British Columbia Investment Management Corporation
- Canada Pension Plan Investment Board and Lazard for Olympus Capital Asia
Competition for Asian secondaries deal of the year in 2017 was fiercer than ever and it’s arguable the three deals in contention all deserve honourable mention. There can be only one winner, and this year secondaries giant Lexington Partners along with advisory firm Lazard took top place. “A really cool deal,” was how one market source described this innovative transaction. Warburg Pincus sold a roughly $1.2 billion strip of its Asian portfolio, made up of stakes in 29 Asian companies, into a new vehicle with new terms.
Lexington was the majority buyer, and Goldman Sachs Asset Management, along with a few other parties, also joined in.
The deal was significant because it involved a large, brand name primary manager tapping the secondaries market to help with its portfolio management – a sign secondaries are becoming more mainstream.
Secondaries advisor of the year in Asia
- Greenhill Cogent
- Atlantic-Pacific Capital
Leading the charge in the region last year was Lazard, which executed at least two headline-grabbing deals, one of which was voted by PEI readers as Secondaries Deal of the Year in Asia. The firm advised on around $2 billion in net asset value of Asia-focused secondaries deals last year, accounting for around 40 percent of regional volume.
“The legitimisation and growth of GP-led liquidity solutions was a key theme in 2017, and Lazard expects volumes in Asia-Pacific to grow in both GP-led solutions and LP portfolio sales in 2018,” said Nick Miles, regional head of Lazard’s private fund advisory group for Asia-Pacific.
Lazard’s work with buyout giant Warburg Pincus on the sale of a strip of assets from its Asian portfolio worth around $1.2 billion grabbed headlines for its innovation, size and brand name GP. Expect Lazard to further open up the Asian secondaries market this year.
Law firm of the year in Asia (secondaries)
- Kirkland & Ellis
- Debevoise & Plimpton
- Simpson Thacher & Bartlett
Kirkland & Ellis has done a clean sweep of the secondaries categories, picking up the award for best in North America, best in Europe and best in Asia, for the second year in a row. The firm worked on one of the most interesting deals to take place in 2017, the $1.2 billion sale of a strip of Asian assets from Warburg Pincus XI, an $11.2 billion, 2012-vintage buyout fund. The deal, which involved the sale of 29 separate stakes, many of which were in venture capital funds, was backed by a group of investors led by Goldman Sachs and Lexington Partners. As well as being one of the largest secondaries transactions to take place last year, the structure highlighted the growing range of possibilities that the market can offer.
[caption id="attachment_7071" align="alignright" width="149"] Pierre-Antoine de Selancy[/caption]
A majority of limited partners feel their liquidity needs are not met by the secondaries market and are seeking alternatives, according to a new report from preferred equity firm 17Capital.
Liquidity in Private Equity Funds, which surveyed 50 LPs and general partners from Europe and North America, found that 62 percent of LPs felt their needs were not met by the secondaries market and 69 percent felt it was burdensome to sell.
Sixty-seven percent of LPs said that they have used or would consider using an alternative liquidity solution, such as preferred equity or debt tranches.
Pierre-Antoine de Selancy, managing partner of 17Capital, said that while it may be easier to sell a position in a well-known fund because buyers are likely to have the information they need to diligence the assets, it is still laborious in the case of smaller or more niche funds.
“There’s much more work required and the LPs often start the process knowing it will create a loss in the portfolio," he said. "You might have some cases in which GPs are unwilling to give their consent, they might only accept certain investors or direct the transaction towards existing investors instead of new ones… It’s much simpler today than it was 15 years ago but it still involves quite a lot of work to get a transaction going.”
The study also highlighted a divergence in the views of LPs and GPs when it comes to the pace of distributions from mature funds. Sixty percent of LPs have expressed dissatisfaction with the pace of liquidity from these funds, compared with 21 percent of GPs.
Jas Sidhu, investment manager at the West Midlands Pension Fund, is quoted as saying: "We have had an excellent sellers market for the last four to five years and mature funds have not been able to return capital. Is it because GPs were too slow to deploy capital post-crisis or are they really bad at exiting?"
De Selancy believes that most GPs are doing a good job distributing to their LPs, but that the poor ones tend to leave a bigger impression.
“When you re-up or decide to commit to new funds, perception is everything," he said. "GPs shouldn't underestimate perception of their clients, the people paying the fees and the rents for the offices. I strongly believe that businesses in our industry start with LPs and not the investment team.”
A majority of private equity and global real estate investors surveyed by fund administrator Augentius are most concerned about asset valuations, the challenges of finding investment opportunities and market regulation this year.
The findings published in Augentius’s annual industry survey for 2018 suggest a “nagging disconnect” between the concerns of some of the global LPs versus their managers in some regions.
Half of the global LPs that were surveyed expressed a more bearish sentiment for the industry this year as compared to 2017. In contrast, a majority of the Asian and American GPs expect 2018 to fare better, or similar, than 2017.
In addition, 25 percent of the global LPs listed communicating with their GPs as a top challenge. However, for the UK and European and Asian managers, this was cited as a low priority.
Even though a small percentage of the global LPs recognise cybersecurity threat as a key challenge, more than 60 percent are looking to increase their spending on technology.
In contrast, there is a significant difference in how the European, American and Asian managers assessed market risks in 2017 and their outlook for this year, including the potential impact of financial policy shifts and cybersecurity threats.
GP-led restructurings have been a feature of the private funds market, including private real estate, for a number of years, facilitated by the rapid rise of the secondaries market. With high-profile secondary players holding large amounts of capital, these types of transactions have become ever more frequent among fund managers.
Once seen as bespoke and perhaps a sign that fundraising was not going particularly smoothly, or that a manager was struggling to realise all of a fund’s assets, now more successful fund managers are looking to these restructurings as part of their overall management strategy. But while there are increasing numbers of these transactions taking place in the market, none are identical. Nevertheless, we’re detecting that many fall into one of two camps.
The first we call ‘end-of-fund life’ transactions. The term GP-led restructuring covers a variety of different transactions, each with different drivers. One common motivation is to provide certainty over the divestment horizon for funds approaching the end of their life which are still holding a number of quality assets that would benefit from a longer term. This is particularly prevalent in strong yield producing funds such as core real estate, or where the market is such that divestment opportunities are infrequent.
Selling off assets at the end of the initial term or seeking annual extensions - which provides little certainty over the divestment horizon - may not be an attractive proposition for the manager or many of its investors. However, in finding a solution, the manager has to balance the needs of its investors which require an exit from the fund as planned, and those which wish to continue their investment.
Their attraction is that while they are becoming more standardized, there is an ability to shape the terms and the structures in a way to suit all parties involved.
Many managers structure transactions to roll assets into a new vehicle and allow investors to either move to this new vehicle or exit the existing fund entirely. New capital is injected into the new vehicle, often by secondary players attracted by the assets in question.
A key issue for managers to consider when planning such a transaction, however, is valuation. This presents a potential conflict situation for the manager as it has an interest on both sides of the sale, but the deal has to be attractive for both the incoming buyer and the exiting investors for it to be successful. The price offered by the new investors could be the result of a competitive bid process involving numerous potential buyers, and this could be backed up by an independent valuation to protect exiting investors.
A further but key consideration is incentives for the manager. While investors rolling over their commitments may be hesitant to change manager incentives, the previous arrangements may no longer be appropriate depending on the lifespan and objectives of the new vehicle.
RE stapled transactions
The second are stapled secondaries. While the fundraising market is currently strong for certain managers, the competition for investors’ commitments means that some managers are looking to provide additional incentives to commit to their new fund. The stapled secondary has become ever more popular and involves combining an investor’s commitment to a new fund with a purchase of interests in a more mature fund run by the same manager.
The interests in the previous fund will obviously only be attractive if the underlying assets are performing well. But if the price offered to existing investors is at the right level, it could incentivize them to also commit to the new fund. This type of transaction has invited scrutiny from regulators, however, particularly the Securities and Exchange Commission in the US, which can affect managers of US capital. The SEC is keen to make sure that existing investors are not getting a raw deal, especially in circumstances where they do not have the option to carry on holding their investment on the same terms.
The two options available could be to sell their interest in the current fund or roll their investment over to the new vehicle on new economic terms. If the price being offered for their current interest is at a discount, then neither option may be attractive. Managers need to take care to analyze their own position and duties to investors, but the popularity and number of these types of transactions increasingly are showing that they can be done properly for the benefit of all involved.
But while there are increasing numbers of these transactions taking place in the market, none are identical.
There are many more types of GP-led restructurings too. Their attraction is that while they are becoming more standardized, there is an ability to shape the terms and the structures in a way to suit all parties involved. Regulators’ concerns can be dealt with and issues such as conflicts and valuations will always be present. But the current appetite of investors and managers for these types of transactions means that they should continue to be a feature of the private funds market for many more years.
Swedish pension fund AP Fonden 3 has invested $50 million in Newbury Partners' latest secondaries fund, double the commitment it made last time around.
The commitment to Newbury Equity Partners IV, which closed last week on its $1.4 billion hard cap after nine months in the market, was made in 2017 but only revealed on Tuesday with the publication of an updated list of private equity holdings on the pension's website.
It is the largest commitment yet made by AP3 to a secondaries manager, the list reveals, it having also invested in funds managed by HQ Capital, Goldman Sachs Asset Management and Verdane Capital, among others.
AP3 committed $25 million to Newbury Partners II, which raised $1.02 billion by final close in October 2010 after eleven months in the market.
Newbury Partners specialises in acquiring limited partnership stakes in buyout, venture capital, special situations, mezzanine funds and funds of funds. It focuses on small and mid-market interests, targeting transactions up to $250 million in value with no minimum deal size.
APF3 has SKr345.24 billion ($42.1 billion; €34.3 billion) in assets under management, according to data from Private Equity International, with 20 percent allocated to alternatives.
In July 2017, Swedish state pensions scrapped restrictions that meant they could not invest more than 5 percent of their total assets in unlisted investments. They are now allowed to allocate up to 40 percent in private equity, real estate and infrastructure.
Sobera Capital has acquired a portfolio of 12 holdings in early stage healthcare companies, continuing with its deal-by-deal approach to secondaries investing.
According to a statement from the life sciences-focused firm, the portfolio was acquired from Innoveas International, a UK subsidiary of German venture capital firm Innoveas, which makes seed and early stage investments in science and technology companies.
Funding from the deal came from a mix of family offices and entrepreneurs, the statement added.
Prize assets in the portfolio include anti-virals developer Presidio Pharmaceuticals, EffRx Pharmaceuticals, which focuses on musculoskeletal conditions, and MORE Medical Solutions, which makes devices for use in orthopaedic surgery.
Innoveas wanted to focus on a set of core, slightly more mature assets, according to Stefan Beil, managing partner at Sobera, adding that the portfolio was offered to Sobera exclusively by an intermediary.
He could not disclose the price, but it is understood to be in the in the single-digit millions.
Sobera Capital targets European growth and small-cap funds and assets in ICT, applied technologies and healthcare with a transaction size of up to €50 million.
The firm, which has been around since 2003, does direct secondaries, LP stake acquisitions and complex GP-led secondaries on a deal-by-deal basis. Given the immaturity of its current asset base, the firm is not likely to raise a blind pool fund soon, Beil said.
"The risk profile [of early stage assets] is different from a mid-cap portfolio," he said. "People want to see a [more mature] anchor portfolio, around which you could build a blind pool fund. But you cannot plan for that. It has to be an opportunistic approach."
The firm has some experience with managing funds. In August 2016, it took over the management of four vehicles backed by a group of German savings banks. Initially evergreen vehicles, Sobera restructured them into closed-end private equity vehicles with fee- and carry- structures.
Partners Group is planning to raise about €1 billion for its new global infrastructure fund, with secondaries funds receiving a share.
According to sister publication Infrastructure Investor, the new vehicle will continue the integrated strategy of its predecessors and is understood to be looking to invest 40 percent of its proceeds in direct infrastructure deals, with 60 percent to be deployed in both primary and secondary infrastructure funds.
The Swiss firm is expected to launch Partners Group Global Infrastructure 2018, the fourth instalment of the company’s Global Infrastructure programme, before the summer, according to sources with knowledge of the fund.
It will act as a successor to the Global Infrastructure 2015 fund, which also raised €1 billion and is targeting returns of 7-10 percent, according to the Vodafone Pension Plan, one of its investors. LPs in the previous fund also include UK local authority investors such as Fife, Warwickshire and Essex.
Partners Group declined to comment.
Previous instalments of the Global Infrastructure strategy include Partners Group Global Infrastructure 2012, which closed on €1 billion in January 2014. At the time, the firm said the approach employed by the fund enabled it to “take advantage of valuation differences” in the market. The fund was double the size of the first Global Infrastructure 2009 attempt, which closed on €500 million in March 2011.
Partners wrote in its H2 2017 Private Markets Navigator report that in infrastructure, it sees better relative value in traditional secondaries involving inflection assets - those in which the value creation process has just begun. It also wrote that it expects a correction in public markets will lead debut private markets investors to part with private equity stakes amid the high pricing environment.
“We believe many of the new market entrants into private markets will waver in their commitment to the asset class in the event of a near-term market pullback,” the firm wrote. “Any pressure on asset valuations should bring increased seller volume to the secondary market and open the door for experienced secondary investors to take advantage of market dynamics turning back in favor of buyers.”
[caption id="attachment_23293" align="alignleft" width="180"] Jonathan Abecassis[/caption]
Has the secondaries market reached a peak?
JA: We think there is more room for growth. The main thing we look at is the turnover as a percentage of overall NAV. It still remains extremely low relative to any other asset class. The GP-led trend is becoming more popular because it makes it easier and more transparent for LPs to transact in their portfolios. The easier it is for people to transact, the more they will do it.
Secondaries funds have diversified their mandates in recent fundraisings and are very interested in doing other types of transactions. We're doing more stapled transactions, a lot of principal groups backed by financial institutions or family offices are spinning out, and we're seeing people do preferred equity deals so that they don't have to sell the upside. The market is broadening in terms of the type of offering.
Credit Suisse appointed you to co-head the secondaries team, and you added Sameer Shamsi from Evercore. What are your thoughts on staff changes in the market and how is the group positioning itself?
CA: We've seen a lot of movement [of staff] in the market both on buy- and sellsides. It was an interesting topic of discussion for 2017 and we see this as a sign that the space is maturing. It's nice to see the market evolve from what was once a cottage industry to today, a close to $50 billion market. Turnover is just a natural part of that – I see it more as an evolution rather than a revolution and something that's healthy and important as any market continues to grow and develop.
Our positioning has remained consistent – we focus on quality over quantity; we aren't and have never been a volume shop. That applies to both the size of our team as well as the mandates we take on. We've executed over 70 successful GP transactions since inception, which we think is the most of anyone in the space. In terms of our team, we're part of the broader private fund group which has over 70 professionals globally.
Which regions are you most excited about?
JA: We've seen some exciting trends in emerging markets in the last couple of months. Pre-crisis, there wasn't that much invested in Asia and emerging markets, and there was a huge amount raised for those regions following the financial crisis. Now, that's starting to translate into market opportunities in secondaries.
The private fund group has advised on $2.5 billion of secondaries transaction volume in emerging markets, including successfully executing five such transactions in 2017. Additionally, we have raised $21 billion of primary commitments in emerging markets.
[caption id="attachment_23291" align="alignright" width="180"] Chris Areson[/caption]
How seriously should buyers take emerging markets?
CA: In our experience, when we have brought these transactions to market we have secured the full time and attention of the buyer universe – so we think buyers are taking them seriously already. Certain geographies in emerging markets aren't for everybody, but we do think buyers have really started to focus on markets other than the US and Western Europe.
We closed three deals in Asia in 2017 and we are seeing an increasing trend in those markets opening up, which is nice. It is something people have been waiting for to happen.
Why did Europe dominate in terms of GP-led deals last year?
JA: I think it's a coincidence. It just so happened that one large-cap European GP moved first. It's natural that a couple of others followed. It's clear from our conversations with GPs that everybody, irrespective of geography, is now starting to ask “how can I capitalise on this trend for my own LPs?”
CA: Historically we had seen more GP-led transactions occur in North America than in Europe, dating back five-plus years. The circumstances and motivations around those transactions were different to the transactions getting completed today. Geographically, European GPs may have been a little bit removed from those earlier deals, and as the market has evolved many were waiting, thinking about things, and coincidentally we happened to see a number execute transactions last year.
Some GP-led deals have happened without an advisor. Does that worry you?
JA: In the GP-led side, it's really the exception rather than the rule. The scope for an advisor to add value to these types of transactions is extremely high because the portfolios are a lot more concentrated, so it's more M&A-like in nature, and the situations tend to be more complex. In a well-run process, the advisor has the ability to demonstrate to buyers why they should pay more which results in a better price for sellers. We also have the technology and structuring expertise having done over 70 GP-led transactions, including over 30 European and emerging market deals over the years. We can add a lot more value than you can in LP portfolio sales which tend to be much more commoditised.
Jonathan Abecassis and Chris Areson are co-heads of secondary advisory in Credit Suisse Asset Management’s private fund group.
A funny thing happened at Private Equity International's CFOs and COOs Forum last month.
Well, it was more interesting than funny, depending on what makes you tick: four GPs sitting down for a Chatham House Rules session on how they calculate and benchmark their performance and finding differences across the board.
The absence of a standardised way of calculating performance is striking, and nuance after nuance put the CFOs at odds with each other. Do you include the GP commitment when calculating net IRR for the fund? How do you account for recycled capital? How does the preferred return compound? How long do you leave your credit line outstanding (assuming you are one of the 90 percent of managers at the conference that use one)? Are cashflows aggregated into monthly or quarterly periods?
And if much of the performance is based on unrealised net asset value (which it likely is), what is the valuation methodology used? And does the reported NAV account for carried interest?
“There is variability all over the place,” noted the moderator.
Walking out of the session it was clear that, for any investor conducting due diligence on these funds, a comparison between them would not be meaningful, at least without going back to cashflow data and recalculating each of their track records.
To be clear: this did not seem to be a case of opacity or wilful evasiveness. The panellists all agreed that they present their performance in what they deem to be the most appropriate way and footnote anything they think needs clarification. The implication was this: managers are transparent, but they are not standardised.
Should investors care? Is it worth a busy investor's time to comb through every cashflow and NAV calculation to find that it should be a net internal rate of return of 22 percent rather than 23?
“It’s a good question,” says Graeme Faulds, a former fund of funds manager who co-created performance analysis software TopQ, now part of eVestment. “Directionally it probably isn’t too meaningful, but as a proportion it can be a big difference. And if it puts a manager in a different quartile then it is even more relevant.”
That brings us to another reason this matters: benchmarking.
Many GPs and investors buy in benchmark data for marketing and decision-making, respectively. But if four GPs in a room all arrive at their net IRRs in a different way, what does that say about the aggregated performance data that they might use as a benchmark? Footnotes are lost in the morass.
Taz Katira, a principal in the fund investment team at Hamilton Lane, says his firm started using its own data for benchmarking – built from the ground up – about five years ago. In pockets of the market, there is a “rubbish in, rubbish out” problem with some external data sets, says Katira; some rely fully on data sourced from GPs on a self-reporting basis or from public sources like pension fund results. That process does not consistently address issues around currency fluctuations or have consistent accounting for accrued carried interest, for example.
So those GPs that choose to benchmark against other private equity funds are measuring themselves against a very muddy pool (hence firms increasingly using public markets equivalents).
This is not the first time that the methodology for calculating performance has been discussed – the US Securities and Exchange Commission first started asking these questions back in 2014 – and it surely won’t be the last. But what stood out most from the session at the forum was that, while the private funds industry as whole is moving towards institutionalisation, transparency – at least from a performance data perspective – is proving stubbornly elusive.
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Lexington Partners has launched its ninth flagship secondaries vehicle, becoming the first of a number of big firms set to return to the market this year.
The New York-headquartered firm registered Lexington Capital Partners IX in Delaware on 12 February, according to a public filing. The fund's target is around $12 billion, two sources familiar with the fundraise told Secondaries Investor.
Lexington declined to comment.
Minnesota State Board of Investment's investment advisory council recommended a $150 million commitment be made to the fund at its 12 February meeting, pending approval from the state board of investments, according to the pension's website.
Lexington's last secondaries fund was its fourth mid-market vehicle which targets US mid-sized US buyout funds that are less than 50 percent invested. It closed above target on $2.66 billion in September.
The firm's last flagship fund closed in April 2015 on $10.1 billion, above its target of $8 billion, after around 19 months in market, according to PEI data.
The Wall Street Journal first reported that Fund IX's target was $12 billion.
Investors in the fund include Alaska Retirement Management Board, Florida State Board of Administration and Houston Police Officers' Pension System.
This year is likely to be highly competitive in the secondaries fundraising market. In December Secondaries Investor reported that Ardian was planning to raise a mature secondaries fund targeting at least $8 billion in the second half of 2018.
In January Coller Capital hired rainmaker Remy Kawkabani as the firm plots a likely return to market this year. Its $7.2 billion Fund VII, which closed at the end of 2015, is understood to be nearly fully committed.
Newbury Partners has held a $1.4 billion final close on its fourth secondaries fund, according to a statement from the firm, exceeding its target of $1.25 billion.
Investors in Newbury Partners IV include pension funds, family offices, insurance companies, endowments and corporations from across North America, Europe, Asia and Australia, the statement noted. No placement agent was used.
These include AP Fonden 3, according to PEI data.
Fund IV held a $1.3 billion close in October, having held closes on $700 million and $1.1 billion in June and July, respectively. It is understood the fund has a 10 percent allocation to direct co-investments which average $10 million in size.
Newbury specialises in acquiring limited partnership stakes in buyout, venture capital, special situations, mezzanine funds as well as funds of funds. It focuses on small and mid-market interests, targeting transactions up to $250 million in value with no minimum deal size.
The firm had previously collected $1.1 billion for its 2013-vintage Newbury Equity Partners III, which was backed by LPs including Australian pension Construction and Building Unions Superannuation Fund and Dutch pension Pensioenfonds PNO Media, PEI data show.
This fund close brings its assets under management to $4.2 billion, according to the statement.
LGT Capital Partners and Idinvest Partners have emerged as the lead buyers in the GP-led process on German private equity firm Halder's 2008-vintage fund, Secondaries Investor has learned.
The firms led a consortium of buyers who acquired stakes in the Frankfurt-headquartered firm's Halder-GIMV Germany II and committed fresh capital for new investments, according to a source familiar with the matter. As part of the deal, Fund II will be extended by two years.
It's not clear if the fresh capital is part of a stapled deal.
Existing limited partners in the €325 million fund were given the opportunity to stay or sell their stakes to the consortium. Pricing details and the size of the deal and the number of sellers were unclear.
It is understood that advisory firm and placement agent Rede Partners advised on the transaction, which closed at the end of January.
Secondaries Investor reported in August that Halder was working with Rede on a potential fund restructuring process.
Fund II launched in December 2007 and reached hard-cap within three months. Due to the financial crisis, its investment period did not begin until 2009 and it did not make its first acquisition until 2011, according to Halder’s website.
Halder primarily buys majority stakes in small- and medium-sized enterprises with a turnover of more than €400 million, usually through a management buyout. It has raised five funds in all, the first three focused on Germany and Benelux, the most recent two, GIMV Germany and GIMV Germany II, focused purely on Germany.
Seven assets remain in the fund, according to Halder’s website, including prosthetics manufacturer Amoena, Italian luxury leather goods company BMB and medical precision parts manufacturer Klingel.
There were 13 initial investors in the fund including Adams Street Partners, AlpInvest Partners and fund of funds ACG Capital.
Rede and Idinvest declined to comment. Halder and LGT had not responded by press time.