Fundraising for secondaries is at record highs, with at least $24 billion raised in the first half of this year for private equity and almost $190 billion raised by the top 30 managers over the last five years.
Amid the healthy fundraising environment, the composition the firms that made our second SI 30 ranking is changing.
The amount of capital raised by Europe-headquartered firms in this year's list rose 23 percent to almost $69 billion from around $55 billion last year, more than any other region by value. They accounted for eight of the 30 managers, with notable final closes in the last 12 months including AlpInvest Partners' $6.5 billion for AlpInvest Secondaries Program VI and Paris-based Committed Advisors' €1 billion for its third fund.
Meanwhile in Asia, where some players such as Canada Pension Plan Investment Board have ramped up operations in expectation of an uptick in dealflow, there were no Asia-headquartered firms in this year's SI 30 – a sign that limited partner appetite for secondaries in the region is still dwarfed by strategies focusing on Europe and North America.
Final closes for Asia-Pacific funds over the past four years have been sporadic, and there were no final closes for Asia-Pacific dedicated funds in the second half of 2016 or first half of 2017.
“The secondary market in Asian assets is still limited," Ardian’s UK head Olivier Decannière wrote in the firm's annual report for 2016. "Everyone is looking but it’s harder to find high-quality portfolios and coverage of the market is not as detailed, especially at the level of local market funds and among small caps.”
US-headquartered managers remained the largest source of capital, with 17 firms accounting for 52 percent of the almost $190 billion raised since 2012, little changed in percentage terms from last year's ranking.
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Akina Partners is targeting €300 million for its seventh flagship fund of funds, Secondaries Investor has learned.
The firm, which was acquired by Swiss counterpart Unigestion in February, has raised $40.9 million for Euro Choice VII, according to a filing with the US Securities and Exchange Commission, with date of first sale listed as 19 July.
Akina's Euro Choice vehicles, the first of which launched in 2000, according to PEI data, target primary investments in mid-market European buyout, growth capital and special situations funds as well as opportunistic secondaries deals, a spokesperson for the firm confirmed.
Euro Choice VII will follow the same strategy as its predecessor 2016-vehicle, and allocate as much as 20 percent of its total investments to secondaries, a source familiar with the fund told Secondaries Investor.
Euro Choice VI closed on €410 million, above its €300 million target, in January 2017. It had already made 13 investments, including three secondaries transactions (respectively targeted at Italy, Spain, and Central and Eastern Europe), by the time of final close.
Unigestion's acquisition of Akina created a European mid-market specialist with more than €25 billion in assets. The two investment teams still work on their respective funds and with their own existing investors, Unigestion's chairman Bernard Sabrier told Secondaries Investor in February.
Unigestion is in market with its dedicated secondaries fund Unigestion Secondary Opportunity Fund IV, which is targeting €300 million. It held a first close in August 2016 on €177 million, according to an announcement by the firm.
The top 30 secondaries managers over the last five years have raised an eyewatering $190 billion in that period.
But the figure should come as no surprise to anyone keeping a keen eye on the market. In the 12 months since we published our debut SI 30 ranking – which tracks capital raised in the last five years – several records have been broken. For private equity secondaries alone, fundraising hit a first-half high this year of$24 billion, bolstered by at least seven final closes above $1 billion.
This year, again, the market leader is clear: Ardian. The firm broke the infrastructure secondaries record by raising $1.7 billion for ASF VII Infrastructure, and in the last five years it has amassed almost double the amount of capital as second-placed Strategic Partners.
“Secondaries has come of age,” says Benoît Verbrugghe, Ardian’s US head. Major institutional investors are using the market, which has long shed its ‘distressed sellers only’ image. “There is still plenty to come from the secondaries market, particularly as the private equity industry grows.”
At least nine of the 30 firms that made our ranking this year are fundraising, a sign LP appetite for secondaries is yet to reach a peak.
Five join our ranking for the first time: Intermediate Capital Group, Montauk TriGuard, Aberdeen Asset Management, Altamar Private Equity and Stafford Capital Partners. Many of these firms focus on niche strategies such as restructurings and real assets.
“A lot of secondaries funds are trying their best to differentiate themselves in different parts of the market,” says Mark McDonald, global head of secondaries advisory at Credit Suisse’s private fund group. “Mega-funds are writing $1 billion-plus cheques to buy very large LP portfolios, and you’ve got small niche funds trying to do smaller, quirkier, off-market direct secondaries and GP-led deals.”
DRY AS A BONE
Dry powder estimates range from $68 billion to $83 billion, according to advisory firms Evercore and Greenhill Cogent respectively, which means market participants are having to push innovation and make creative deals. These include HarbourVest Partners’ take-private of SVG Capital, Ardian’s $2.5 billion stapled deal with Abu Dhabi’s Mubadala Capital and BC Partners’ stapled process to aid fundraising for its 10th flagship buyout fund.
“Increasingly you’re seeing transactions happen with these higher quality GPs with good assets and bigger portfolios,” says David Atterbury, managing director at HarbourVest Partners. His firm is one of the 12 GPs in the SI 30 that held final closes in the 12 months to June, amassing $4.8 billion for its Dover Street IX fund.
“There’s a big market out there in terms of funds that are in year eight, nine or 10 of their lives, and there is demand from investors into secondaries funds to access that market.”
Taking that into account, and with primary dry powder at $1.5 trillion, the peak for secondaries fundraising could be some way off.
SI 30 Methodology – how we determine the 2017 ranking
The SI 30 ranking is based on the amount of equity capital raised for dedicated secondaries pools of capital over a roughly five-year period. This year, the window spans from 1 January 2012 to 30 June 2017.
We give highest priority to information that we receive from or confirm with the fund managers themselves. When secondaries firms confirm details, we seek to “trust but verify”.
Some details simply cannot be verified by us and in these cases we defer to the honour system. In order to encourage co-operation from secondaries fund managers that might make the SI 30, we do not disclose which firms have aided us on background and which have not. In the event we do not receive confirmation of details from the firms themselves, we seek to corroborate information using firms’ websites, press releases, news reports and limited partner disclosures, among other resources.
Secondaries capital: For the purpose of the Si 30, the definition of secondaries capital is: capital raised for a dedicated programme of investing directly into the secondaries market. This includes equity capital for diversified private equity, real estate, infrastructure, buyout, growth equity, venture capital and turnaround or control-oriented distressed secondaries investment opportunities. We also count any portion of a fund of funds earmarked specifically for secondaries investments.
Capital raised: Capital definitively committed to a secondaries direct investment programme. In the case of a fundraising, it means the fund has had a final or official interim close after 1 January 2012. We count the full amount of a fund if it has a close after this date. We count the full amount of an interim close (a real close, not a ‘soft-circle’) that has occurred, even if no official announcement has been made. We also count capital raised through other means, such as co-investment vehicles.
What does NOT count as secondaries?
Direct private funds: We do not count capital raised for funds that invest directly into the primary markets, whether this be for private equity, real estate or infrastructure.
Hedge funds: We do not count hedge funds, meaning funds that target liquid securities or trading strategies.
Opportunistic investors: Some large entities have the ability to carry out secondaries deals on an opportunistic basis. We do not count these groups because there is no hard capital allocation to their direct-investment programmes.
Debt, including mezzanine debt funds: We only count equity investment funds for this ranking. All debt funds, including mezzanine debt funds, will not be counted towards the ranking.
PIPE investments: The Si 30 counts private capital raised for secondaries investments. Therefore, we do not count capital raised for PIPE deals.
Deal-by-deal: We do not count capital raised on a deal-by-deal basis to be invested into secondaries opportunities.
Click here for last year's SI 30 ranking.
Neuberger Berman has bolstered its ranks in Asia, hiring Lydia Hao to focus on private equity investment across the region, sister publication Private Equity International has learned.
Hao took up the role of principal on 15 August, reporting to Kent Chen, managing director and head of private equity in the Asia Pacific region. She joins the firm after seven years at Canada Pension Plan Investment Board in Hong Kong, where she was one of the founding members of the private equity Asia team building its direct investment portfolio across the region.
Hao will also work alongside Amit Sachdeva, also a principal, who joined the firm in 2016 after seven years at AlpInvest Partners in Hong Kong, where he focused on co-investments.
Neuberger has been on a secondaries hiring spree in the last three months. In July it announced it had hired Deutsche Bank's Scott Koenig in New York to launch a real estate secondaries business, and in May the firm hired Coller Capital veteran Philipp Patschkowski in London to help build its European private equity business, as Secondaries Investor reported.
In an interview with PEI Chen said he has been “actively building a best in class Asia PE team” since he joined the firm in 2015. He initially worked alongside Brock Williams, who has recently relocated to the US and remains focused on Asia.
“While we may not be the biggest team in the Asia PE market, the team is one of the most experienced, collectively having invested substantial amounts of money in Asia in the past decade, through different market cycles,” Chen said.
“All of the team members are capable of investing across private equity strategies, including primary funds, secondaries and co-investments.”
Chen reiterated comments made by managing director and global head of NB Alternatives Anthony Tutrone in July, who told PEI the firm would happily wait two or three years to find the right person for a role.
“When we are hiring, we are looking for people who are not just from the region and speak the local language, but also have a deep understanding of the Asian culture,” Chen said, adding that, as a global firm with global clients, it also needs people who are able to work in a multicultural environment.
Team members also must have a strong track record of “real investment experience” in Asia, where the private equity market has been growing quickly.
“Every week there’s a new GP starting a new fund. So we need people who know the Asia market inside-out to be able to cover the market sufficiently.”
Chen added that, looking forward, Neuberger Berman would continue to grow its Asia team “as needed”.
“We continue to look for the right candidates to grow our platform. But this is a long term process, we will take our time and wait for the right candidates.”
DIVERSE RISK AND RETURN
Chen told PEI that “despite the headline news” highlighting macro challenges such as a China slowdown, volatility, and slower growth in developed markets, Asia “is still the fastest-growing market”, accounting for between 10 and 15 percent of the global private equity market. Each country offers different opportunities – such as buyouts in Japan, Korea and Australia, growth and buyout opportunities in China, and growth investments in India and Southeast Asia – with a different risk-return profile, giving investors “a lot of diversification benefits”.
In each of the sub markets there are more and more GPs with the right skill-set, platform and track-record for investors to evaluate, Chen said. In recent years, he has seen an increase in both country- and sector-focused funds, as well as both pan-regional and country-specific private lending funds.
“All of this is a sign of a more diverse and mature market. That’s also the reason why we need to grow our team, to be able to serve our clients who are showing strong interest in investing in Asia.”
These developments “are good and bad”, Chen says; good in that a more diverse, transparent and efficient market gives investors more choice, but bad in that it poses new challenges, particularly for investors with limited resources.
“In the old days, it was quite straight-forward, just pick a few pan-Asian funds for exposure to Asia. But now with so many different country- and sector-focused funds and different strategies, you need to have people not just on the ground but who have the right local knowledge to do a proper job.”
Larger institutional investors which make big commitments to Asian funds are also running into difficulties when it comes to executing co-investments.
“Because of the diversity of these sub markets, it’s quite difficult for them to execute Asian co-investments from a distance. So in reality very few investors are taking up their co-investment rights and as a result they cannot use co-investments as a tool to lower the effective fees in their Asia PE portfolio.”
Tactical sellers are those using the secondaries market to change the balance of their private equity portfolios by vintage year, investment stage, asset type, geography or manager.
Although the profile of their portfolios would change anyway as existing funds reached the end of their lives and they chose to re-up (that is, commit to that manager’s next fund) or not, the long lives of private equity funds make this a very slow process. By accessing the secondaries market, investors can speed up the transformation of their portfolios dramatically.
Large US pension plans have been particularly enthusiastic tactical sellers in recent times. Examples include: CalPERS; Virginia Retirement System; PSERS; Kodak Retirement Income Plan Trust; and Florida State Board of Administration. Among Canada’s pension plans, Ontario Teachers and CPPIB have been prominent sellers.
Why are they selling? One answer is that LPs are simply becoming less loyal to individual GPs, especially since the GFC, which exposed the divergence in performance between stronger and weaker managers. Coller Capital’s Global Private Equity Barometer for summer 2016 illustrates the point well.
Source: Coller Capital Barometer 2016.
In recent years, many LPs with large numbers of GP relationships, having reviewed their portfolios, have judged a proportion of these relationships ‘non-core’ to their portfolios — for a variety of strategic, financial, and non-financial reasons.
Recognition of the opportunity-cost of holding non-core managers, and a desire to broaden investment exposure (by geography or strategy type, for example), have brought many investors to the secondaries market. With emerging markets likely to account for an increasing share of economic growth over the long term, investors are understandably keen to grow their exposure to these markets — and unwilling to wait until the liquidation of their existing private equity commitments to do so.
Coller’s ‘Barometer’ shows that 55 percent of LPs are currently invested in Chinese private equity, and over 40 percent have exposure to South East Asia and India. Moreover, many LPs already invested in emerging private equity markets want to increase their exposure, particularly to Africa, Central & Eastern Europe, and China.
Tactical sellers tend to be very price sensitive because, by definition, they are not forced to sell. When secondaries pricing fell sharply as a result of the GFC (from 104 percent of NAV in 2007, to 63 percent of NAV in 2009) tactical sellers withdrew from the market, despite the fact that many of them found themselves overcommitted to the asset class. When growing economic confidence resulted in higher secondaries pricing in 2010, tactical sellers returned; and when average secondaries pricing reached around 90 percent of NAV in the first half of 2014 they came to the market in droves.
By 2015, the secondaries market was turning over around $40 billion of transactions annually, and tactical selling by LPs accounted for around two-thirds of its volume. Incidentally, it is worth noting that tactical selling — or active portfolio management — has varied somewhat by geography, comprising a larger part of the market in North America than in Europe, where strategic sellers have tended to be more important.
Investors use the secondaries market to tackle a variety of imbalances in their portfolios, but one imbalance looms particularly large for many — vintage year. Approximately 45 percent of today’s private equity NAV is in funds of the 2005–08 vintages.
GP-led liquidity solutions
Although a significant part of today’s 2005–08 ‘value mountain’ will be realised by GPs in the normal way, a sizable portion will prove challenging for them to exit within a sensible timeframe (especially where the GFC forced GPs to abandon or radically alter their portfolio companies’ initial investment theses). This reality has given rise to another important market issue — a weakening of LP-GP alignment in ageing private equity funds.
Where they have little prospect of carried interest, or are unable to raise another fund, GPs may be unmotivated to exit investments because doing so effectively puts them out of business. Over $95 billion of assets are held in boom-year ‘zombie’ funds (funds with no successor fund since the GFC) according to Preqin.
Because of these issues, GPs and LPs alike have been increasingly willing to see existing private equity vehicles restructured or (in the case of viable GPs) exited en bloc in asset sales (often called tail-end sales). Such transactions tend to be initiated and led by GPs, with the active involvement of secondaries buyers.
A fund restructuring usually has several objectives: to provide a liquidity option for a fund’s original investors; to secure more time, and potentially additional funding, for a fund’s remaining assets; and to realign the interests of investors (and any new investors) with those of the GP, through some re-setting of a fund’s terms and conditions. Restructurings are complex and present many challenges, not least in achieving a satisfactory alignment of interests between multiple parties. As a result, fund restructurings tend to be highly customised, and no two transactions are ever the same.
Given their complexity to structure and execute — and the commitment needed on all sides
— many mooted transactions of this sort never actually get off the ground. Indeed, these transactions typically entail lengthy discussions with a fund’s LP base and the members of its LP Advisory Committee, and often require the approval of 75 percent of a fund’s investors.
On the buy side, a major challenge for bidders is a high level of uncertainty that a transaction will eventually be completed. Nonetheless, between $5 billion and $6 billion of GP-led liquidity solutions were completed in each of 2014 and 2015 — some 15 percent of overall secondaries market volume — and intermediaries believe this level is likely to be maintained or surpassed in the years ahead.
Partners Group has broken the back of the fundraising effort for its latest private real estate secondaries fund, hauling in €1.2 billion against a €2 billion hard-cap, sister publication PERE can reveal.
Following the closing, thought to have taken place earlier this month, it is understood the Zug-based private markets investment firm is anticipating a final closing for its Partners Group Real Estate Secondary 2017 fund around the turn of the year.
Secondaries Investor reported last November the fund had been registered with the US Securities and Exchange Commission. No fundraising target was included in the filing, but it transpired that the firm was targeting $2 billion, a similar amount to the equity it raised for the previous fund in the series, Partners Group Real Estate Secondary 2013.
That fundraise was noteworthy at the time because the firm raised almost double the original target of the fund. Investors in that vehicle included San Bernardino County Employees’ Retirement Association, Strathclyde Pension Fund and Texas Mutual Insurance Company.
The fund remains the largest pool of capital to have been raised expressly for private real estate secondaries, although it may not hold that record for much longer, even if it hits its 2017 fund hits its hard-cap.
Partners Group’s closest rival in the asset class, Landmark Partners, is also fundraising for its latest vehicle, Landmark Real Estate Partners VIII. It has targeted the same amount, although that fund has a $2.75 billion hard-cap. Its previous fund was closed on $1.6 billion, also at its hard-cap, in May 2015. A first closing of $260 million for Fund VIII happened in December and another $245 million was raised in February. A final closing is also anticipated at year-end.
If both Partners and Landmark close on hard-caps, and to schedule, the result would mean a deluge of private equity positioned for taking investments in existing investment vehicles. Both firms have invested large sums in tail-end funds and vehicle restructurings of late and it is understood such strategies will again feature prominently, indicating a scale of primary funds that are reaching maturation stages.
According to multiple research papers, the overall real estate secondaries markets transaction volume declined from a high of approximately $7.5 billion in 2015 to $4 billion in 2016, owing primarily to fewer large deals. In Landmark’s own annual research, the firm said while the scale of transactions to have occurred in the year had decreased, at 99, the number of deals was 8 percent up on the prior year and predicted that trajectory to continue.
Earlier in August Secondaries Investor reported that Landmark and Carlyle's Metropolitan Real Estate Equity Management were buyers in an almost $2 billion deal with Harvard Management Company, the manager of the US’s largest university endowment.
Partners Group typically targets mid-teens IRRs from its investments for its private real estate secondaries funds.
The firm declined to comment.
Investors in Quadriga Capital's 2006-vintage buyout fund have been sounded out about a restructuring, Secondaries Investor has learned.
The deal would be worth around €100 million and involve a "concentrated pool" of small-cap and mid-market assets from Germany and other parts of Central Europe, according to three sources familiar with the transaction.
According to a memorandum sent to investors by an asset management firm, extracts of which have been seen by Secondaries Investor, Quadriga believes it will need a three- to four-year extension on its €525 million Quadriga Capital III in order to achieve maximum value from its remaining assets. The fund has two years left of its original life.
It is understood that Park Hill is running the process.
Quadriga III held a final close in February 2007, according to PEI data. Limited partners in the fund include New York State Teachers' Retirement System, Virginia Retirement System, the European Investment Fund (which committed €40 million) and HarbourVest Partners.
According to Quadriga's website, remaining assets in the fund include Ipsen, which develops heat treatment solutions for metal parts; meat logistics company Vpool; and Kinetics, which produces high-purity gases and piping networks.
One limited partner in Fund III described it as "not a top quartile fund" while another said a "mixed outlook on the GP" is an obstacle to a successful restructuring.
In February 2013 Quadriga held the final close on €511 million for its fourth fund. Investors in that fund included Virginia Retirement System with a $50 million commitment, New York State Common Retirement Fund with $10 million and Alaska Permanent Fund with a $14.3 million commitment, according to PEI data.
The process on Fund III is one of at least two restructurings in the market involving a German general partner. In late July Halder, another mid-market specialist, invited bids on the restructuring of its €325 million Halder-GIMV Germany II fund.
Quadriga Capital and Park Hill did not return requests for comment.
Sister publication Private Equity International recently caught up with Cambridge Associates’ Andrea Auerbach, author of research note When Secondaries Come First, to discuss how the strategy fits into a wider institutional portfolio and the key questions investors should be asking managers. Here are some of the takeaways:
It’s not just for first-timers
Secondaries is increasingly accepted as a sensible jumping-off point for institutions building a private equity programme from a standing start. As capital is deployed and returned more quickly than in primaries, you can “demonstrate success earlier than you could with other strategies”, says Auerbach, not to mention the immediate vintage year diversification.
But it isn’t just for newbies; there’s a strong argument for more mature programmes to include an allocation to secondaries.
“I think it would behove anyone managing an established programme to reflect on ‘what is the return profile offered to me by secondaries, does it have a place in my programme?’” Auerbach says.
“What we’ve observed in our clients is that the answer to that question is yes. It has a faster cashflow element, it’s an ability to capitalise on dislocations in the secondaries market when there are dislocations, buying things at even more of a discount and writing them up. It does appear to have a mainstay element, especially when you consider the private equity arena just continues to mature and offer these more specialised areas of investment.”
IRRs look great, but shouldn’t be taken at face value
Cambridge data show that in 2011 the median net return for secondaries funds was an eye-catching 20.9 percent. This compares with 7.9 percent for funds of funds. The pooled return for US buyout and growth equity funds from 1990-2014 was 13 percent.
But these data points take a bit of interpreting. “Let’s be clear, you’re getting a very different source of return with your secondaries fund than you are with your primary fund,” Auerbach says. “[With a primary fund] your money is out for longer, compounding and returning a return for longer, and for a lot of CIOs and a lot of institutions, especially right now in a low-return environment, the longer your money can be working to generate a compelling return, there’s some value to that.”
“[Secondaries funds] can put their money to work faster, so the J-curve mitigation is real, they often can write up the assets they acquire, so there’s a quick pop in the IRR, and it’s distributing capital faster. So your IRRs can start brightly and then start to fade a little bit.”
Leverage can confuse matters
“It sounds simple; let me go build an exposure by making a commitment to a secondaries fund, and I’ll get backward-looking exposure to the private equity market at a discount,” says Auerbach. “Then when you overlay transaction structure and being able to leverage deals, that adds another layer of information and awareness that investors need to better understand.”
This leads to a number of vetting questions investors need to ask managers, she adds. “What is the source of your return? How much of the return am I getting through your ability to underwrite and purchase portfolios at a good discount? How much of the return is coming from the leverage you’ve used to underpin your purchase? Being able to deconstruct the components of return from a secondaries fund is important and it is a question many institutional investors ask.”
What does your secondaries allocation add to your portfolio? Email us: firstname.lastname@example.org.
SL Capital Secondary Opportunities Fund III (SOF III), SL Capital Partners' latest dedicated secondaries fund, is expected to close in the fourth quarter of this year, Secondaries Investor has learned.
The fund is targeting $400 million, according to data from Private Equity International, and will focus on niche areas of the market including stakes in funds of funds and secondaries funds.
SOF III hit first close on $213 million in October 2016, having launched that April. Investors in the fund include the San Bernardino County Employees' Retirement Association with a $25 million commitment and Cumbria Local Government Pension Scheme with £25 million ($32.2 million; €27.5 million), according to PEI data.
The fund is expected to generate a net internal rate of return of 17 percent over the life of the fund, according to an investment due diligence report by NEPC Investment Consulting presented to SBCERA on 12 April.
The fund has a 10 percent carried interest rate and a 10 percent hurdle rate. SOF I and II had higher hurdle rates, at 14 percent and 12 percent respectively, according to the document.
Predecessor fund SOF II closed in May 2015 on $291 million, above its target of $200 million, after less than 12 months in the market. It is around three-quarters deployed, Secondaries Investor has learned.
SL Capital declined to comment.
Landmark Partners has added a vice-president, Will Smalley, to its private equity team, Secondaries Investor has learned.
He started in July and will be focused on the "origination, underwriting and negotiation of private equity investment," according to Landmark's newly updated website.
Smalley comes from a four-year stint at Coller Capital, where he started as a summer associate before becoming senior associate, then investment manager. Prior to that he was an analyst with energy investment banking group Raymond James & Associates.
According to his LinkedIn page, he holds a bachelors degree in business administration from University of Texas at Austin and an MBA from the NYU Stern School of Business.
Landmark Partners is currently in the market with its flagship secondaries fund Landmark Equity Partners XVI, which is targeting $4 billion. The fund hit first close in May 2017 on $223.5 million, Secondaries Investor reported.
Investors include the Employees’ Retirement System of the State of Hawaii ($100 million) and Employee Retirement System of Texas ($87.5 million), according to PEI data.
In June, Landmark Partners emerged as buyer in the €650 million restructuring of Intermediate Capital Group's 2010-vintage European mezzanine fund, Secondaries Investor reported.
Last week saw Landmark Partners' real estate secondaries arm and Metropolitan Real Estate Equity Management emerge as buyers of almost $2 billion-worth of real estate assets from Harvard Management Company, the manager of the US's largest university endowment.
Some UK private fund firms may have to restructure their management as a result of new rules being introduced by the country’s regulator, according to a legal source.
The Senior Managers and Certification Regime, designed to ensure there are clear lines of accountability within regulated firms, is expected to apply to private equity firms from March 2018 and requires each senior manager to have clearly defined responsibilities.
“In organizations where there are multiple reporting lines or where responsibilities are shared between individuals, this is likely to require a degree of analysis and soul searching to define what should be appropriate under the new regime. This might involve changing management structures or role definitions,” Michael Thomas, a regulatory lawyer at Hogan Lovells, told pfm.
The regulation, which has applied to banks since 2016, will apply at different levels of detail depending on the size of the organization, he added.
“Most firms will fall under the ‘core’ regime, with some needing to comply with the ‘enhanced’ requirements that largely reflect the regime that banks had to implement last year,” Thomas said.
Implementing the regime and ensuring ongoing compliance is likely to place a “significant burden” on firms across management, front office and legal, HR and compliance departments, according to a second source.
While it may be painful for some private equity firms, the extension of the regime to cover them and other non-bank, Financial Conduct Authority-regulated firms will provide a more harmonized framework for the regulation of individuals across the UK financial sector.
“This always seemed to me to be where we would end up, after the SMCR regime was originally introduced for banks,” Thomas said, “I think it is almost inevitable that the regime will be introduced.”
The FCA is consulting on the extension of the regime, and firms are invited to comment until November 3.
Kline Hill Partners, the small- and mid-sized secondaries specialist, is looking to double the size of its deal team in preparation for the launch of a new fund, Secondaries Investor has learned.
At present the team consists of six investment professionals led by managing partner Mike Bego and partner Jared Barlow, according to the firm's website. Interviews are under way, with new starters set to take up their roles when the fund comes to market next month.
Kline Hill is returning to market with Kline Hill Partners Fund II, which will target $300 million with a hard-cap of $350 million – a considerable step up from its debut offering. The firm aims to achieve first close around the end of 2017 with first investments coming in early 2018, Secondaries Investor understands.
Debut vehicle Kline Hill Partners Fund I closed on $183 million in January 2017 after 15 months of fundraising, Secondaries Investor reported at the time. The fund is around 75 percent invested.
Kline Hill has been an active co-investor from its debut fund, alongside other secondaries firms and limited partners.
In May it partnered with secondaries firm Newbury Partners to buy stakes in Akina Partners’ Euro Choice III and Euro Choice IV funds of funds, as Secondaries Investor reported. The amount put towards co-investments from its debut fund was almost as much as that which went towards conventional secondaries deals, according to source familiar with the fund.
Fund II has no specific allocation for co-investments but will execute as and when they arise, according to the same source.
Kline Hill declined to comment.
Private fund managers are being asked to assess the breadth, efficacy and compliance burden of the Volcker Rule in a consultation launched by a banking regulator, according sister publication Private Funds Management.
The Office of the Comptroller of the Currency, one of the five regulators which originally drafted the legislation, has issued a 25-question consultation on the rule which restricts the amount of Tier 1 capital a bank can invest in private equity.
The OCC has asked whether there are issues related to the scope of the rule’s application that could be addressed by regulation, what evidence there is that the final rule has been effective or ineffective at limiting bank exposure to private equity, and whether there are any categories of entities for which the final rule could be revised to reduce the burden associated with compliance.
The regulator is not proposing any specific changes to the rule, but it is “paving the way” for a rewrite or a clarification of some sections of the regulation, according to law firm White & Case.
“The OCC indicates its intention to use any information obtained as a result of the consultation to inform the drafting of a proposed rule, which suggests that comments from all banking entities, whether or not supervised by the OCC, are solicited,” the firm said in a client note.
Any revisions to the rule proposed as a result of the consultation would need to be approved by the other four regulators responsible for its oversight.
Consensus that the Volcker Rule needs simplification has emerged from various sources within the Trump administration. The Treasury Department said in June that the current definition of covered funds – in which bank investments are restricted – was too broad. Ex-Federal Reserve governor Daniel Tarullo said in his exit interview there was scope to reform the rule because it is “damaging market-making activities”.
The consultation is open until September 21.
Treasury Secretary Steven Mnuchin has sold his stakes in Dune Real Estate Partners, the offshoot of a hedge fund he founded, according to documents filed with the US Office of Government Ethics, reported by sister publication Private Equity Real Estate.
Mnuchin, a former Goldman Sachs partner, founded New York-based hedge fund Dune Capital Management in 2005 with other Goldman alumni, including Daniel Neidich, who was head of the New York investment bank's real estate group.
In 2010, Neidich transitioned the hedge fund's real estate holdings to a separate firm, Dune Real Estate Partners, and Dune Capital Management was wound down. Dune Real Estate Partners now has $2.2 billion of assets under management and is raising its fourth value-added fund, according to PERE data.
In May, Mnuchin sold his stake in DREP II and Dune Real Estate Partners for at least $2 million each, according to a certificate of divestiture released last week. Mnuchin, who is not listed on Dune's website, owned a 2.7 percent stake in Dune Real Estate Partners II, according to a March filing with the OGE. The value-added fund closed on $794 million in May 2009, according to PERE data. Neither the size of his interest in Dune Real Estate Partners nor the buyer or buyers of the stakes were disclosed. The firm could not be reached for comment.
Mnuchin reported $271,737 in income from his stake in DREP and $1.2 million in income from his interest in DREP II in a January filing with the OGE. The Treasury Secretary, who was confirmed in February, could not be reached for comment.
In June, Mnuchin said he had completed the necessary divestitures to comply with federal conflict of interest rules, according to an OGE filing.
Abbott Capital, a New York-based fund of funds manager, has reached a $121 million second close on its debut secondaries fund, according to a filing with the Securities and Exchange Commission.
Its target and hard-cap have not been disclosed.
The firm expects Abbott Secondary Opportunities to stay in market for at least another year, the filing reveals. Minimum investment in the fund is $250,000 and Fortress Group, a Georgia-based firm, has been advising on the fundraising.
On the same day, the firm launched Abbott Secondary Opportunities Cayman, an offshore fund with a life of less than one year. The target is not disclosed. Fortress Group will also be acting as placement agent on this fund.
Abbott Secondary Opportunities has been in the market since March 2016 and announced a first close on $102.5 million in July from four different investors, Secondaries Investor reported.
In addition to secondaries, Abbott invests in buyout, growth equity, venture capital and special situations, according to its website.
In January 2015, the firm’s director Martha Cassidy told Secondaries Investor it was planning on increasing its secondaries investments to between $50 million and $100 million each year.
In June 2017 the firm announced it was looking for a secondaries-focused vice-president to “source, screen, evaluate, analyse, execute and monitor secondary private equity investments”.
Abbott’s annual funds typically make both primary and secondaries investments in private equity funds and have ranged in size between $80 million and $150 million in recent years, according to PEI data.
The firm was founded in 1986 and manages over $7 billion in private equity assets, according to its website.
Abbott was approached for comment but did not reply in time for publication.
The Pennsylvania State Employees’ Retirement System (Penn SERS) is to update its reporting protocol to better illustrate the impact of fees on fund performance following auditor recommendations.
Reports should include both net and gross fee returns to show how expenses affect investment returns, Pennsylvania auditor general Eugene DePasquale said in a report published this week.
“Additionally, comparing the gross and net [figures] by manager could indicate how aggressively SERS was able to negotiate fees,” the report stated.
DePasquale recommended that SERS make the fee reporting process more transparent, including reporting all investment expenses and fees for management, performance, fund expenses and portfolio company charges in its annual financial reports and on its website; mandating all investment managers to “distinctly identify and report all investment fees and expenses incurred by SERS,” and by considering using internal investment managers where possible for certain asset classes to “lessen the multi-million dollar fees to external managers.”
The recommendations are in line with those issued to other US pension schemes. In June, New Jersey proposed a fee and carry disclosure law, requiring the New Jersey State Investment Council to report its external fund managers’ fee and carried interest data on its website, and to the boards of trustees of each state-administered retirement system in the state.
Secondaries funds that Penn SERS is invested in include Ardian Secondary Fund VII, to which it made a $100 million commitment. At the start of August, the fund committed $50 million to Asia Alternative Capital Partners V, which can invest up to 30 percent in secondaries and direct co-investments.
Penn SERS has a private equity allocation of 15.7 percent, and $26.3 billion of total assets under management. It has trimmed its allocation to private equity from 22.4 percent in 2013, a 6.7 percent decrease.
Lexington Partners has acquired stakes from 22 LPs in BC European Capital IX in a $1 billion deal, sister publication Private Equity International has learned.
They elected to sell either all or part of their interest in the 2011-vintage, €6.7 billion fund through the tender offer, according to a source with knowledge of the matter. It is understood that a significant number of these LPs elected to retain some exposure to the fund.
Between 7.5 percent and 8 percent of the fund’s investors tendered their stakes.
It is understood that the $1 billion investment is split roughly 70-30 between the Fund IX tender and the Fund X staple commitment.
LPs received a letter on 5 July with an offer allowing them to sell their interest in the fund at a 14 percent premium to March net asset value. They had five weeks to respond to the letter, as previously reported by Secondaries Investor.
Lexington initially undertook to purchase €1.2 billion from Fund IX as well as to commit €600 million in new capital to BC European Capital X, which is in market seeking €7 billion.
For BC's part the tender offer allowed them to actively manage their investor base – providing liquidity to those who wished to participate – and secure a sizeable commitment to its fundraising exercise.
In a press release, Lexington said it has been investing in funds managed by BC Partners for more than 15 years.
“The potential for GP-led transactions in today’s secondaries market is significant,” Marshall Parke, international managing partner of Lexington, said in the statement.
“This sizeable transaction with BC Partners marks an important milestone for Lexington and the secondaries market in providing innovative liquidity solutions.”
BCEC IX had a net internal rate of return of 17 percent and a 1.5x multiple as of 31 March, the source added.
Since then the fund has completed its final selldown of shares in broadband provider Com Hem, delivering more than 2x; partially exited telecoms company Altice USA through an IPO; and partially exited media company Mergermarket, delivering an implied valuation of 3.2x.
It is understood that 17 investments remain in the portfolio.
According to PEI data, at least 60 LPs initially committed to Fund IX.
North American pension plans included the California State Teachers' Retirement System, Canada Pension Plan Investment Board, CDPQ, Florida State Board of Administration, Los Angeles City Employees' Retirement System, Michigan Department of Treasury, New York State Teachers' Retirement System and San Francisco Employees' Retirement System.
Asian investors included Korea Investment Corporation and National Pension Service of Korea.
University endowments and foundations included Columbia University, the Rochester Institute of Technology, the Grable Foundation, the University of Oklahoma Foundation and the James S McDonnell Foundation.
There were also several insurance companies and private pension plans committed to Fund IX such as Dusseldorf-based Ergo, Guardian Life Insurance Company of America, the Finnish Ilmarinen Mutual Pension Insurance Company and CNP Assurances of France.
It is unclear which investors decided to sell stakes.
Campbell Lutyens advised on the process. Simpson Thatcher & Bartlett served as legal counsel to Fund IX and Macfarlanes acted as legal advisor to Lexington.
"This innovative transaction represents an evolution of the secondaries market and highlights the strong demand for stakes in private equity funds ran by quality managers,” said Andrew Sealey, managing partner and chief executive at Campbell Lutyens.
“With the success of BC Partners' offering, we believe other top GPs will follow suit and this type of deal will become more and more commonplace.”
In July, Secondaries Investor reported that Fund X had raised €6 billion toward its target. The fund, which has been on the fundraising trail for about a year and a half, is still in market.
Lexington Partners declined to comment beyond its press release. BC Partners declined to comment.
The materials for the California State Teachers’ Retirement System’s investment committee meeting on 12 July included an unusual attachment: chief investment officer Christopher Ailman appended a summer reading list for his board.
Dismiss any thought of ‘top 10 light beach reads’ – this is purely investment-focused.
The list includes 21 titles, grouped into three categories:
- ‘The LEGENDS of investment theory’, which includes such industry “bibles” as Security Analysis by Benjamin Graham and David Dodd;
- ‘2017 Trending Topics: Behaviour Economics & Risk’, which includes Charles Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises (“history doesn’t repeat,” Ailman writes alongside this one, “but it hums the same tune, this provides a critical history lesson that human emotions control markets”);
- ‘Modern era All-Stars’, which includes Peter Bernstein’s Capital Ideas: The Improbable Origins of Modern Wall Street.
Ailman tells us he’s reading one of his ‘2017 Trending Topics’ titles – Richard Thaler’s Misbehaving: The Making of Behavioral Economics, described by The New York Times as a “sly and somewhat subversive” book that is “part memoir, part attack on a breed of economist who dominated the academy”.
The list – and Ailman’s own choice – made us wonder about what the rest of the private equity investor community is dipping into. Are they indulging in a spot of light reading? Or are they using the summer to mug up on investment trends?
We asked LPs across the world which books they had decided to pick up this summer. You won’t be surprised to discover there are no romance novels on the list, nor are thrillers top of the agenda. (That’s their story and they’re sticking to it…)
Investors, it seems, are lapping up global affairs and political history. For example, Doug Coulter, who heads the Asia-Pacific private equity team at LGT Capital Partners – which is investing its flagship $2.5 billion fourth secondaries fund – is reading New York Times columnist Thomas Friedman’s Thank You For Being Late, which, in Coulter’s words, “tries to make sense of the ever increasing pace of change that is the reality we all live in”.
Mark Redman, global head of private equity at Ontario Municipal Employees Retirement System, is perusing Tim Shipman’s All Out War: The Full Story of How Brexit Sank Britain’s Political Class, an analysis of the referendum that led to the UK opting to leave the EU. Meanwhile Kim Lew, vice-president and chief investment officer at the Carnegie Corporation of New York foundation, has been reading Mohsin Hamid’s Exit West: A Novel, which addresses the ways in which refugee status strains personal relationships.
Perhaps looking for advice on how to navigate the challenging terrain of today’s political environment, John Bradley, senior investment officer for strategic investment and private equity at the State Board of Administration of Florida (where secondaries has been the second-best performing private equity strategy since inception), has chosen Endurance: Shackleton’s Incredible Voyage by Alfred Lansing.
“Shackleton’s leadership through adversity serves as a great example for anyone managing a team,” Bradley says.
Also on the more historical side, Queensland Investment Corporation’s Marcus Simpson, head of global private capital, is enjoying Peter Frankopan’s The Silk Roads: A New History of the World, which he describes as “a rare book that changed my perception of world history and why some events unfolded the way they did”.
Some investors are picking up philosophy – Norihiro Takahashi, president of the Government Pension Investment Fund of Japan, is reading Joshua Greene’s Moral Tribes: Emotion and the Gap Between Us and Them – or classics – Richard Clarke-Jervoise, head of the private capital investment team at family office manager Stonehage Fleming, has chosen Ray Bradbury’s Fahrenheit 451.
And we were intrigued by Adams Street Partners’ Yar-Ping Soo’s choice: Joshua Becker’s The More of Less: Finding the Life You Want Under Everything You Own.
“I have been reading more on minimalism and minimalist lifestyles, not just on material goods but leaving space for what is really important in our lives,” she says.
Advice we should no doubt all heed. Happy reading.
What is on your reading list this summer? Let us know: email@example.com
What is your vision for Pantheon’s private equity secondaries business? Can we expect significant changes?
RS: We’ve seen this market evolve both in terms of its depth and its breadth – there’s more choice than ever before. It’s also evolved in terms of complexity. Our strategy is to continue to exploit inefficiencies in the market – because it is a private market and there are inefficiencies – and we do that by leveraging our distinctive platform, our globally-networked primary business and all the other expertise and resources of our wider platform.
MJ: Part of our strategy is to be very selective, finding pockets of value across the private equity secondaries market where we see long-term value that’s not reflected in the figures. To do that you have to be highly disciplined.
Elly Livingstone has been a prominent figure for a long time. What does his new role entail?
MJ: We are a global business, we have stakeholders in key markets around the world, and we concluded that our scale and presence really required on-the-ground representation in two strategically important markets.
Elly continues to be a fully involved member of the partnership and the investment team. We are as busy as we’ve ever been in terms of dealflow – $22 billion in the first half of this year. And there are a lot of more complex deals that require more senior involvement, particularly in the GP-led space where it’s important to have that experience in negotiating directly with general partners.
What keeps you awake at night?
RS: I think it’s fair to identify the amount of capital that has been raised to pursue private equity secondaries transactions. In addition, leverage is being increasingly used to acquire diversified private equity portfolios. The good news is that the supply of deals continues to increase. We are seeing more transactions from pension plans, endowments, foundations and fund of funds in addition to general partners seeking liquidity solutions for their limited partners. As a result, the private equity secondaries market is broader and more diverse than ever.
MJ: This isn’t a risk but it’s something I think about all the time: are there opportunities that are right under our nose that we haven’t noticed? We are in conversations with general partners that we have known for more than a decade. Sometimes we don’t contemplate doing a transaction because we’ve never thought of the relationship in that way. The onus is on us to develop these opportunities. Are we being as proactive as possible in exploring transactions with general partners?
Is sourcing a problem?
RS: Definitely not. One of our key roles right now is thoroughly screening deals. We have a lot of dealflow coming through and picking which ones we want to work on is becoming increasingly important. Only approximately 2 percent of all the private equity secondary transactions we screen end in a transaction.
RS: Another trend we’ve observed is that transactions are being done at an accelerated pace so you no longer have the luxury of spending weeks doing diligence on assets, then submitting an indicative bid, then doing confirmatory due diligence... Today sellers and intermediaries look to execute very quickly. That highlights the importance of having the information in hand so you can move quickly.
To cite a very recent example, I received a call from a market participant seeking indicative bids on a very large LP portfolio to be delivered within 11 days. That’s a very short period of time on limited information. If you are not invested in those funds with those general partners there is absolutely no way you can be competitive.
MJ: You will likely see some parties put in binding bids within that period to try and get some competitive advantage. The higher quality LP trades are moving very rapidly. To Rudy’s point, ten years ago you typically had a three-week period for indicative bids, several parties would go through to the final stage and there’d be another month before final bids. The broker would provide all the information and make introductions to the general partners. Now if you don’t have the information, you can’t bid.
In a world where you and your rivals all have the same information, how do you remain competitive?
RS: There’s different levels of information and types of relationship. If you don’t have an investment in the fund, you’re at a distinct disadvantage. If you’re a small investor in the fund you may get some basic information. But if you are a significant investor in the fund, have a longstanding relationship with the general partner and may even be on their advisory board, then generally the information you receive is significantly better.
MJ: GPs are also becoming increasingly active in managing who can buy positions in their fund. They may only allow a transfer to an approved list of buyers and we have been the beneficiaries of that kind of dynamic numerous times. You might be in a very competitive process and suddenly there are only two or three of you. We’ve been very successful in transactions where we’ve managed to pull an individual fund out of a broader portfolio.
– Rod James contributed to this report.
Economic and political uncertainty in the US and the UK and concerns about growth and stability in emerging markets are the biggest challenges to investing this year, according to Coller Capital's founder and chief investment officer, Jeremy Coller.
The ramifications of Brexit negotiations and the Trump administration are "difficult to forecast", Coller wrote in the firm's Annual Report and Financial Statements for the year ended 31 March.
"Geopolitical uncertainty makes decision-making harder, but it also creates attractive investment opportunities for secondaries funds," he wrote.
Despite the concerns, which include the slowing growth rate in China, turmoil in the Middle East and "real challenges" in several African and Latin American economies, broad-based improvements in the world's economic fundamentals justify cautious optimism, Coller wrote.
The report was filed with Companies House on 7 August.
Amid heightened competition and dry powder – of which Coller estimates there is around $75 billion – the firm will focus on real assets such as real estate, infrastructure and natural resources, as well credit, as secondaries opportunities in these increasingly emerge.
"The secondaries market is evolving rapidly, and new opportunities will be created as private equity continues to advance in to new areas," Coller wrote. The firm will continue to be an "active innovator" in these areas.
The veteran secondaries investor expects pricing to remain stable and volumes to remain healthy, barring significant economic shocks.
"All in all, this is a market that feels broadly in equilibrium," he noted.
Coller Capital’s operating profit for the year ended 31 March jumped 17 percent from a year earlier to £3.4 million ($4.4 million; €3.8 million). Revenue rose to £74.9 million from £64 million.
The firm is investing its $7.2 billion Coller International Partners VII vehicle, which held its final close in 2015, and has been active in GP-led processes, such as the stapled deal tender offer on Avista Capital Partners' first three funds, as Secondaries Investor reported in June.
The private equity secondaries market has experienced rapid growth in recent years, as institutional investors have taken an increasingly active approach to managing their portfolios. Secondaries are the only way for limited partners to exit early from their private equity investments — and the market’s growth is therefore a natural consequence of today’s large pool of outstanding private equity commitments.
In the decade to 2015, LPs committed approximately $3.9 trillion to private equity globally, according to Thomson Reuters. However, the onset of the global financial crisis after the Lehman Brothers crash led to tighter regulations and new economic realities, prompting many LPs to seek early exits from their commitments via the secondaries market. In consequence, the annual volume of secondaries transactions in 2014 and 2015, at around $40 billion, was two-and-a-half times its pre-crisis peak in 2007, according to Coller Capital. These annual secondaries transaction volumes represent 2.4 percent of private equity’s total net asset value.
Secondaries market transaction volumes, 1998-2016F
Average pricing for secondaries transactions (across all types of private equity assets) increased progressively from its post-crash low in 2009, stabilising in 2013 at around 90 percent of NAV, data from Greenhill Cogent show. This evolution reflects the growing maturity of the market and the increasing sophistication of its participants, on both the buy side and the sell side.
Stable pricing and numerous well-capitalised buyers, together with a large number of ageing private equity funds, have resulted in a very favourable environment for secondaries sales — and today the market feels both competitive and well balanced.
Within this environment, the motivations of investors looking to sell private equity assets can be divided into ‘strategic’ and ‘tactical’: strategic sellers (usually financial institutions) are looking to change their business or investment models in response to economic, regulatory or capital pressures; tactical sellers (typically pension funds, asset managers, endowments and foundations) are taking advantage of attractive pricing to reshape their portfolios.
The strategic pressures on financial institutions have been many and varied since the GFC: all banks have had to contend with Basel III; US banks with the Volcker Rule; and European insurance companies with Solvency II; not to mention the regulatory demands of the G20 Financial Stability Board. Banks in the Eurozone have been forced to shrink their balance sheets to compensate for sovereign debt write-downs, and publiclyowned banks in the UK and Ireland have faced government-imposed asset disposals.
Although strategic selling has slowed recently (it made up only 14 percent of secondaries transactions in 2015, according to Evercore), attention is now focusing on the US, where banks need to comply with the Volcker rule by July 2017. The value of private equity assets held on the balance sheets of major European and US banks, which are likely to engage in further strategic asset disposals in the medium term, is estimated by Coller at $50 billion. It is worth noting that this estimate does not include assets managed by banks for third parties.
Aggregate capital invested in private equity by investor type, 2011 and 2016
Tactical selling (or portfolio reshaping) continues apace as LPs use the secondaries market to modify the profile of their private equity portfolios by vintage year, by manager, by investment stage, by asset type, by fund concentration, or by geography. Many large investors are also disposing of private equity interests tactically, in order to focus more of their resources on a smaller core of high-quality managers. Portfolio reshaping also allows LPs to reduce the monitoring costs of their private equity holdings.
Liquidity solutions sought by GPs (rather than LPs) are becoming an increasingly important segment of the secondaries market. GP-led solutions are transactions in which a private equity manager works with a secondaries specialist to offer liquidity options to its existing investors, and to secure additional time and funding in order to maximise the value of its unrealised portfolio.
Lastly, it is worth noting that the volume of transactions involving real assets — infrastructure, natural resources and real estate — has increased significantly in recent years. Indeed, private equity real estate transactions accounted for 19 percent of overall secondaries market volume in 20156; CalPERS alone sold $3 billion of private equity real estate interests in the secondaries market in that year.
Strategic Partners has acquired stakes in a pool of five infrastructure funds in what is understood to be the first tender offer process on a listed infrastructure fund’s portfolio.
The Blackstone unit acquired interests in funds from JPMorgan Asset Management, 3i Infrastructure, Macquarie Infrastructure and Real Assets and SteelRiver Infrastructure Partners, according to a statement obtained by Secondaries Investor from Campbell Lutyens, which advised on the deal.
The transaction involved around $230 million of net asset value.
"One of the nicer features of organising a broader process for a whole vehicle in a more structured way is that you can create volume, and buyers are more likely to be larger institutions," Thomas Liaudet, a partner at Campbell Lutyens, told Secondaries Investor.
"There's a lot of dry powder in the secondaries market and there was quite a strong level of interest [in the deal]," he said.
The five funds are:
- JPMorgan Infrastructure Investments Fund, a 2007-vintage $3 billion vehicle
- JPMorgan Asian Infrastructure & Related Resources Opportunity Fund, a 2008-vintage $859 million vehicle
- Macquarie European Infrastructure Fund III, a 2008-vintage €1.2 billion vehicle
- SteelRiver Infrastructure Fund North America, a 2008-vintage $1.9 billion vehicle
- 3i Barclays Integrated Infrastructure Fund, a 2008-vintage vehicle that 3i acquired from British bank Barclays in 2013. The fund had around £780 million ($1 billion; €863 million) in assets across two funds at the time of acquisition.
The fund stakes were held in a listed investment trust named Global Infrastruktur 2007 AS (GI 2007), which had a NAV of around $382 million as of 30 September. One investor in the vehicle was Headway Investment Partners III, a fund managed by mid-market secondaries specialist Headway Capital Partners, which bought into the vehicle in late 2014 and early 2015. On exit the firm generated a 2x multiple and internal rate of return of more than 30 percent.
Other shareholders in the vehicle included Norwegian and Swedish local pension funds, global asset managers, family offices and individual investors, according to Liaudet from Campbell Lutyens.
The advisory firm ran an auction process during the first quarter of this year, which involved a share buy-back option, and a tender offer in the second quarter. According to an April letter to shareholders from the investment vehicle's advisor detailing the completed process, 16 potential buyers signed confidentiality agreements, and 11 of these gave indicative bids. Three bidders remained in the final round and with Strategic Partners emerging as the winner in July, Liaudet said.
More than 60 percent of shareholders in GI 2007 by value opted to part with their stakes and Strategic Partners agreed to pay 99.5 percent of GI 2007's NAV based on a 30 September valuation date, or around 97 percent of the underlying funds' NAV based on 31 December, the letter noted.
Norwegian law firm Schjodt advised GI 2007 on the deal.
Strategic Partners, which is seeking $1 billion for its second real assets secondaries fund, underwrote 100 percent of the deal. The firm used its latest fund, Strategic Partners Real Assets II, according to a source familiar with the transaction.
GI 2007 will continue to be advised by Obligo Investment Management, a Nordic manager focusing on real estate, shipping, private equity and infrastructure, which is owned by Blackstone.
As of April, GI 2007 held underlying investments in 19 countries spread over six continents. They include airports, ports, waterworks and sewerage, power generation and distribution, hospitals, schools and prison assets, according to the letter.
MEIF III, the Macquarie fund, is GI 2007's largest investment and counts Brussels and Copenhagen airports as its biggest assets. They represented about 37 percent of the investment vehicle. Strategic sales processes on all of MEIF III's investments have been implemented or planned, the letter noted.
Several large infrastructure secondaries deals have closed in recent months. In July, Paris-headquartered Ardian announced it had acquired a €300 million portfolio of infrastructure LP interests from Italian banking group UniCredit, and Dutch pension manager APG Asset Management acquired the portfolio of infrastructure manager DIF's second flagship fund in a €700 million deal also advised by Campbell Lutyens.
[caption id="attachment_5677" align="alignright" width="200"] Alan Feld[/caption]
Vintage Partners X, your fourth secondaries fund, is targeting venture secondaries and fund of funds deals in Europe, Israel and – in the right circumstances – the US. Where do the opportunities lie in these markets?
We are seeing opportunities both in venture funds and in investing into companies. On the companies side, you have situations where founders want liquidity, they want to build a substantial business and also to pay the mortgage. We are seeing situations where angels who invested in a company realise that there are demands for additional follow-on capital, are concerned about being diluted and like to have some liquidity on what they’ve invested in up to this point.
Each market’s very different. In markets where there are [stock] options for employees, sometimes employees who have left the company want liquidity and the company would prefer those shares to be in the hands of a friendly investor – that’s another opportunity.
Another thing we are starting to see increasingly is that there are a lot of funds out there from 2000, 2001 and 2002 that have not yet been wound down. And so there is some interest in selling the tail-end portfolio and GP buyout situations.
On the limited partnership side, in many cases big LPs are cutting down their number of relationships to certain core relationships. Non-top-30 or top-40 global venture funds would not necessarily be among these core relationships and therefore they’re looking for liquidity in those cases as well.
You have a services team that connects large corporate customers with start-ups. Do secondaries investors have to get involved in this way?
I think GPs are going to start asking the question and companies are going to start asking secondaries investors, fund of fund investors and late-stage investors – ‘look what our early stage investors are doing for us, what are you going to do for us?’
We came to the conclusion that we have a very broad database of companies that we track today – about 6,500 companies – and we found that many large corporates, Global 10,000 companies, are looking for curated technology solutions.
They are looking for technologies that will help them solve problems. My partners and I and are whole team – technology investing is all we do. We track trends in the market, we track the companies. We thought that we could add real value because we’ve got this database and we can hook up these companies, these start-ups, with larger companies.
It’s worked out well. We’ve now done curated mapping for almost 250 Global 10,000 companies. Last year we set up 500 qualified lead meetings between start-ups and potential customers. It’s a win for the large corporations because they are getting access to interesting start-ups that someone has curated, and diligenced for them, without being charged. The start-ups get access to potential customers and we get the goodwill of the being the ones who didn’t take a fee but have been helping both sides of the relationship.
Prices are high at the moment. Does it affect your speed of deployment?
Yes, I think valuations are quite high. We’ve been taking our time. That’s one reason we’ve raised a fund that’s relatively small; we are looking at interesting companies that can scale and become significant and we want to find those opportunities at a valuation we believe is fair and is a win for both sides.
The large secondaries funds have gotten so large that the smaller positions in venture funds and direct companies are less interesting to them, so we are not seeing the same degree of price inflation. In fact, the rise of the NASDAQ is allowing companies in later stages to still raise at fairly substantial valuations. In other words, the bar has already been set relatively high.
Landmark Partners and Metropolitan Real Estate Equity Management have emerged as buyers of real estate assets totalling almost $2 billion from Harvard Management Company, manager of the US's largest university endowment.
The value of Landmark's deal was around $1.6 billion and is the largest real estate secondaries transaction so far this year. The deal was revealed in a statement from Kirkland & Ellis, which provided legal advice to Landmark.
While the statement did not name the seller, referring to it as an "American university's endowment", two sources familiar with the deal confirmed to Secondaries Investor the endowment was Harvard.
Landmark's transaction, which reached first close in July, is described by the law firm as a "leveraged secondary market acquisition" which includes the assumption of unfunded commitments.
Metropolitan, which is Carlyle's real estate-focused secondaries and fund of funds unit, acquired more than $250 million worth of stakes in a separate deal, according to one of the sources. The figure includes unfunded commitments and involved stakes in a handful of managers that Metropolitan has strong relationships with, the source added.
It is understood that both Landmark's and Metropolitan's deals closed around the same time.
Landmark did not return a request for comment by press time. Metropolitan declined to comment.
In April Secondaries Investor reported that Harvard had approached advisor Greenhill Cogent to help it reduce its exposure to the real estate asset class. The portfolio consisted of at least 50 fund stakes diversified by strategy, regional focus and vintage, sources said at the time.
Harvard's move to divest was reportedly driven by Rick Slocum, who took up the newly created post of chief investment officer in March.
The endowment has sold in the real estate secondaries market before. In the first half of 2015 it put $1 billion of stakes on the market, around $500 million of which ended up being acquired.
Landmark is in market with its eighth real estate secondaries fund. Launched in autumn 2016, it has a hard-cap of $2.75 billion. A first close was held in December followed by an interim close in February on a combined $505 million, according to data from sister publication PERE.
Metropolitan is also in market, seeking around $1 billion for its sophomore secondaries fund. The fund held a "strong first close" in the second quarter of this year, David Rubenstein, Caryle's founder and co-chief executive, said in an earnings call on Wednesday.
According to data from Greenhill Cogent, real estate secondaries transaction volumes stood at $4 billion in the first half of 2017, driven by a handful of large transactions and an increase in dedicated dry powder. “The market is on track to meet or exceed the record $7.5 billion of real estate transaction volume in 2015,” the investment bank noted.
– Rod James and Adam Le contributed to this report.
As buyside competition has increased over the last few years, dedicated buyers have refined their strategy to focus on segments where they feel they can be most successful. Consequentially, the market has experienced the beginning of a fragmentation in the dedicated buyer universe into two main categories: large portfolio buyers and niche specialty buyers.
Large portfolio buyers use their scale to diligence sizeable transactions efficiently, to cover a majority of the potential fund universe on a real-time basis and to utilise favourable leverage terms to improve expected returns. These buyers have been able to consistently raise multi-billion dollar funds and have generated relatively stable returns for their investors.
Niche speciality buyers focus on gaining an information advantage in a specific segment of the market so that they are optimally positioned when assets in their target universe are available. Niche buyers tend to raise moderately sized funds and are more selective as to the specific assets they purchase. While a concentrated focus has the potential to deliver outsized returns, it does not provide the same level of portfolio diversification, which can help mitigate negative shocks.
This dynamic is largely forcing mid-sized generalist buyers to shift focus towards one end of the spectrum, which has improved demand depth in less traded strategies. Dedicated buyers of real estate, energy and infrastructure have improved the sale-ability of these fund strategies and Greenhill Cogent expects that additional capital and resources will continue to move into these areas of the market. Increased buyer specialisation is also encouraging buyers to use novel transaction structures and financing arrangements, further differentiating a niche strategy from the broader buyer universe.
GP-led transactions have been among the fastest growing segment of the secondaries market and the underlying growth drivers of this trend are expected to be prevalent for the foreseeable future. Many early GP-led transactions were driven by firms that needed a transaction in order to stabilise their franchise. However, market acceptance has expanded the profile of GPs interested in exploring a transaction and it now encompasses the full spectrum of manager strategy and quality. Regardless of fund size or historical track record, nearly all managers are actively exploring ways that the secondaries market can help to achieve strategic priorities in an LP-friendly manner.
The potential emergence of venture and real assets GPs that have launched, or who are considering, a GP-led transaction has the ability to drive volume growth in this segment of the market for some time to come. Transactions with buyout managers should continue to be the bulk of GP market volume in the near term but in the medium term the strategy mix should shift towards other fund strategies.
As transactions are becoming more prevalent, LPs are beginning to take a more active role in shaping GP-led transactions to ensure their best interests are considered throughout the process. Greenhill Cogent expects that as GP-led activity persists, LPs will continue to become more proactive in this segment of the market. The underlying drivers of historical secondaries market growth are still present today and should continue to encourage increased transaction diversification, market depth and LP participation. Secondaries market pricing is currently near record levels and Greenhill Cogent expects that average market pricing should remain stable over the medium term, even as pricing dispersion between individual funds fluctuates. Market supply has diversified away from buyout and venture funds as transaction options in other strategies grow. Increased specialisation of the secondaries buyer universe should further improve market depth and seller optionality. Traditional LPs, asset managers and GPs have on average increased their knowledge of, and participation in, the secondaries market, and Greenhill Cogent expects that this is a structural trend, which is only in the early stages of developing. Given the growing prevalence of the secondaries market, a thorough understanding of the ways in which the secondaries market could be used to more efficiently achieve strategic priorities should be a priority for all institutional investors.
Click here for part I and here for part II of this chapter.
Brian Mooney is a managing director of Greenhill Cogent and has more than 15 years of secondaries market experience. Prior to co-founding Greenhill Cogent, Brian was part of the investment team at The Crossroads Group where he focused on secondaries acquisitions as well as primary investments and equity co-investments.
Jeremy Joersz is a vice-president at Greenhill Cogent, part of Greenhill’s Capital Advisory group. He joined Greenhill Cogent in 2010 and is a member of the firm’s secondaries advisory team. He is responsible for all aspects of client engagements and transaction execution, including preparation of engagement materials, valuation analysis, due diligence, structuring and marketing.
Fund of funds stakes saw the strongest first-half volume growth amid notable increases all around, according to Setter Capital's Volume Report H1 2017.
The volume of secondaries transactions involving fund of funds stakes increased 289.4 percent between the first half of 2016 and the first half of 2017, from $161 million to $627 million. Such deals accounted for 5 percent of all private equity secondaries in the first half of 2017, a period in which total deal volume increased 56.3 percent to $29.1 billion, according to the survey.
Other big increases were seen in energy secondaries transactions, which increased by 163.3 percent to $882 million year-on-year in the first half, and large buyout stakes, which hit $13.5 billion, an increase of 73.1 percent from the first half of 2016.
"Some of the dealflow was expected but the increase in fund of funds volumes was massive," said Zia Rahman, an associate at Setter. "On the energy side we were seeing volatility all along, with buyers specifically requesting funds and a lot of sellers trying to get out."
Looking ahead, 58 percent of respondents felt that the second half of 2017 will see similar volumes to the first, with 28 percent expecting a meaningful increase. Respondents predicted total volume for the 2017 fiscal year to be $55.7 billion, a 32.15 percent increase from the $42.2 billion seen in 2016.
Respondents were also upbeat about pricing, expecting on average that net asset value valuations will increase by 1.52 percent in the second half of 2017 compared to the first. This contrasts with the results of the first-half 2016 report, when a 4 percent decrease in NAV was predicted.
Setter surveyed 138 secondaries funds, pension funds, investment consultants and family offices for Volume Report H1 2017. Respondents include Pantheon, HarbourVest Partners, Partners Group and Hamilton Lane Advisors.
Hollyport Capital, the London-based tail-end investor, has acquired stakes in two buyout funds, according to UK regulatory filings.
The firm bought a stake in 3i Europartners IVc, a 2003-vintage, €2.7 billion buyout fund targeting European mid-market opportunities, from Amundi Secondary Fund 2016 through its Secondary Opportunities V-B vehicle, a filing showed. It is not clear when the deal closed, though Amundi was only admitted to the fund as a limited partner in January 2017, according to a filing on the Companies House website.
Hollyport Secondary Opportunities V-A also acquired a stake in Nova Polonia II from FCPI SWEN LBO Europe on 17 July, according to a separate filing. NPII is a 2006-vintage, €100 million vehicle focused on lower mid-market opportunities in Poland and managed by Krokus Private Equity, according to the firm’s website.
Investors in the fund include the European Bank for Reconstruction and Development and Natixis Private Equity, according to data from Private Equity International.
Krokus was founded by Chase Manhattan Bank and Polish bank WBK in 2006. Its most recent vehicle, the 2015-vintage Krokus Polonia IV, has raised €16 million of its €80 million target, according to PEI data.
It is not known how much Hollyport paid for either stake.
The £187.5 million ($246.4 million; €207.6 million) Hollyport Secondary Opportunities V has previously acquired stakes in EQT III and Terra Firma Capital Partners II, according to PEI data. LPs in Hollyport V include ICG Enterprise Trust, which committed £7.5 million in July 2015, according to the London-listed company’s annual report and accounts for 31 January 2016.
Hollyport is returning to the market with a sixth secondaries fund of around £400 million, Secondaries Investor reported in February. The firm currently manages $550 million in assets.
Amundi and 3i declined to comment on the deal. Hollyport, Swen and Krokus had not returned a request for comment by publication time.
Arle Capital Partners’ sale to distressed specialist Newgate Capital Private Equity is the latest twist in the saga of Candover Partners, one of the most high-profile victims of the global financial crisis.
London-headquartered Newgate announced at the end of July it will acquire Arle, which was set up in 2011 to manage CP’s troubled portfolio. The acquisition by Newgate, which specialises in distressed legacy private equity assets, aims to ensure that Arle does not go into liquidation.
Arle managed two legacy funds from Candover: Candover 2005 (€3.5 billion) and Candover 2008 (€2.8 billion, including €1 billion from Candover Investments, CP’s listed parent company). The funds were wound up in March, with the 2008 vehicle, whose sole remaining investment was oil and gas services company Expro, terminated before the end of its 10-year life.
A senior partner from Arle will remain as non-executive director of Expro, while two other accounts staff will remain under contract to provide support in relation to the winding up of the fund entities, David Morton, a partner at Newgate, told sister publication Private Equity International.
Arle’s roughly 200 investors, who are Candover legacy investors that have holdings in Expro, are to roll over into one special purpose vehicle “to facilitate the winding up of the various fund structures, with resulting cost savings for investors,” said Morton.
A troubled timeline
Candover was a high-profile private equity casualty of the 2008 financial crisis, having operated for nearly three decades. In 2008, Candover Investments committed €1 billion to CP’s 2008 fund and took on debt by raising $150 million through high-yield bonds. With the crisis starting to bite, private equity assets being written down by as much as 40 percent and assets becoming harder to sell, the parent company could not meet the €1 billion fund commitment without breaching its bond covenants. It was also forced to give other LPs the option of pulling out of the 2008 fund.
A statement from CP at the time explained that “investor commitments will be scaled back pro rata subject to an appropriate follow-on reserve of €100 million”. With follow-on financing from the Candover 2005 Fund, this would allow Expro, the oil and gas company both funds were invested in, to “take advantage of market opportunities,” PEI reported.
Candover’s portfolio was highly leveraged and the firm struggled to source proprietary deals in the run up to 2008. The firm “lost its soul chasing large and pricey deals in competitive auctions”, Cyrille Chevrillon, a former managing director at the firm, told Bloomberg in 2010.
“The old Candover were what you’d call a light-touch team,” an LP who mulled investing in the 2005 fund told Private Equity International in 2012. “They were financial investors – they’d buy a company, go round the City, get some leverage in there and not do much with it. And because it was a rising market, and they bought good companies, they made a nice business out of it,” the LP added.
In early 2009 some of Candover’s legacy assets succumbed to lenders including Ferretti, an Italian yacht-maker the firm bought from Permira for €1.8 billion in 2006. Gala Coral, a gambling group, was handed to creditors in June 2010.
Candover officially spins out as Arle Capital Partners with John Arney, who had been managing partner at CP, working to dispose the firm’s legacy assets
The portfolio is still in trouble, valued at around 60 percent of its residual cost at the end of June. Arle manages to sell safety equipment maker Capital Safety Group for $1.1 billion in January, generating a 2.7x return
The asset sales continue with Qioptiq, a photonic product manufacturer, sold to Excelitas Technologies. Arle refinances another portfolio company, Hilding Anders International, a bed manufacturer, with KKR investing in a subordinated position in the capital structure with a €350 million investment
Arle helps to wind up the €2.7 billion Candover 2001 fund by co-investing with Electra Private Equity in another legacy asset, Innovia, for €498 million
The firm sells Stork Holdings, an oil and gas maintenance company, for €695 million to Fluor Corporation
KKR buys Arle’s stake in Hilding Anders for an undisclosed sum. Arle proposes to be liquidated and seeks advisory services from Newgate. It sells Innovia for $1.1 billion to Canadian group CCL Industries
Candover Investments announces that Arle will enter solvent liquidation of the 2005 and 2008 funds
Arle disposes of one of the last remaining legacy assets, Parques Reunidos Servicios Centrales, a Spanish entertainment park operator. Arle’s remaining 27 percent stake in the business is distributed among 150 institutional investors and Candover Investments. The latter received about 2.5 percent of the company, according to a trading update.
Arle is acquired by Newgate
The name 'Glendower' may be new to those in the secondaries market, but the team behind Glendower Capital, freshly spun out of Deutsche Bank, is anything but.
Its partners, Carlo Pirzio-Biroli, Charles Smith, Adam Graev, Chi Cheung and Deirdre Davies, got their start 15 years ago as secondaries sellers.
Deutsche Bank had about €6 billion of private equity assets on balance sheet and Smith, who came from the M&A side of the bank, ran a process to spin out 130 direct investments worth €1.5 billion. With Cheung, who had also been in M&A, Smith moved to the corporate investment side of Deutsche Bank. They teamed up with Pirzio-Biroli and Davies and sold the remaining €4.5 billion, a process that was completed in 2005.
When all was said and done, they had sold 600 assets in 150 transactions (everything from fund auctions to GP-led restructurings, spin-outs and a large securitisation) with no intermediaries.
“We were the largest sellers in the secondaries market for almost four years,” Pirzio-Biroli says. “We sold assets to 90 buyers on a repeat basis so we got to know almost all secondaries shops and we thought ‘it’s a very inefficient market and there’s room for one more institutional player’. We pitched the bank to let us set up a secondaries business.”
In 2007, the group raised its first fund, closing $775 million for DB Secondary Opportunities Fund I, with capital from investors including Deutsche Bank, Coller Capital, Lehman Brothers and LGT Capital Partners. The second fund closed in 2012 on $614 million and its third vehicle closed in 2014 on $1.65 billion.
Over the years, the team has made a speciality of focusing on mid-market deals, splitting its transactions roughly 50-50 between fund stakes and GP-led transactions. It typically buys assets that are funded at a high percentage and has, on average, purchased assets at a 25 percent discount. Over the life of the team, it has completed about 90 transactions averaging $35 million in size.
Its global strategy – the team has offices in London and New York – has paid off. Across its three funds, with different sizes and vintages, invested in different market cycles, the secondaries unit delivered attractive similar return profiles, according to an investor, with an aggregate net internal rate of return of about 20 percent and a net 1.7x multiple.
But the journey, although ultimately successful, was also chaotic and while the bank was not interfering with its investment strategy, the secondaries unit was bounced around for many years as a ‘neglected child’, a person familiar with the history of the team says.
The team changed reporting lines within the bank more than 10 times. It was, at one point, merged with a primary fund of funds and a direct investment shop within Deutsche Bank. The entire asset management division was almost sold to Guggenheim Partners in 2012, which affected the fundraising process for its second fund.
The final straw came a little bit more than six months ago when Deutsche Bank decided to cancel bonuses as it suffered under a hefty litigation bill with the US over toxic mortgage securities.
“The very difficult compensation cycle may have tipped the event,” the person says of the spin-off.
Deutsche Bank declined to comment for this story. Glendower Capital declined to comment on the circumstances of the spin-out.
With a fresh start and a name ready for battle (Glendower was the Welsh warrior immortalised in Shakespeare’s Henry IV), the firm is expected to begin pre-marketing the Glendower Secondary Opportunities Fund IV in the autumn, seeking between $1.5 billion and $2 billion, a source familiar with the matter says. Glendower Capital declined to comment on the fundraising.
If that fundraising goes well and if the firm remains disciplined by sticking to its proven investment strategy, the name Glendower will become a fixture.
What sorts of challenges do newly formed spin-outs face? Email us: firstname.lastname@example.org
Vintage Investment Partners, an Israel-based investment firm, has held the final close on its fourth secondaries fund above target.
The Israel-headquartered firm amassed $215 million for Vintage Investments X, beating its $175 million target, according to a statement.
"Vintage believes that general partners and technology company [chief executives] should expect genuine added value from secondaries investors as a pre-requisite for access to their venture funds and companies", Ehud Hai, partner and chief technology officer at Vintage, said in the statement.
Vintage X was backed by US, Canadian and Israeli financial institutions, university endowments, foundations and family offices. Most investors in the fund are existing LPs in the firm's previous funds, according to the statement.
The fund will purchase LP stakes in Israeli, European and US venture and growth equity funds. The firm will also make direct secondaries purchases through acquiring shares in private technology companies from entrepreneurs, former employees and angels.
Fund X's predecessor is a 2013-vintage that raised $161 million, beating its $150 million target, according to PEI data, which shows San Francisco-headquartered Jim Joseph Foundation as an investor in the fund.
Average high bids for stakes in venture capital funds were 82 percent of net asset value in the first half of this year, the lowest among all strategies, according to a July report by Greenhill Cogent.
Vintage Investment Partners has around $1.5 billion under management and employs 27 professionals.
Halder, a German small- and mid-cap private equity firm, is restructuring its €325 million Halder-GIMV Germany II fund, Secondaries Investor has learned.
Bids on the process were due late last week, according to a market source. Advisory firm Rede Partners is understood to be running the process.
Halder tends to buy 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, are focused purely on Germany.
GIMV Germany II launched in December 2007 and its 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.
According to a fund fact sheet published on the company website, Halder-GIMV II has an investment period of five years with an option for a one-year extension. The fund invests between €15 million and €90 million per transaction and aims to close two or three transactions a year.
The minimum investment is €10 million, while the GP has contributed €20 million. The management fee is 2 percent, carry 20 percent and hurdle 7 percent, with an option for more capital to be raised once 75 percent has been invested, according to the fact sheet.
There were 13 initial investors in the fund including Adams Street Partners and AlpInvest Partners.
Seven assets remain in the fund, according to Halder's website, including prosthetics manufacturer Amoena, Italian luxury leather goods company BMB, medical precision parts manufacturer Klingel and food manufacturer Wback.
Halder claims to have returned a multiple of 3.3x and gross internal rate of return of 31 percent between 1991 and 2008, the year that GIMV II was launched.
Halder did not return a request for comment by press time. Rede Partners declined to comment.
Strategic Partners, through its Strategic Partners Orchis Acquisitions vehicle, is one of the buyers in a $100-million-plus stake divestment by Japan's Norinchukin Bank, Secondaries Investor has learned.
The deal priced in the first quarter and closed in the second, according to source familiar with the deal. Some of the sales appear to be from funds that are well over a decade old, including the Terra Firma Capital Partners II and Charterhouse Capital Partners (CCP) VII, which are both 2002-vintage, according to UK regulatory filings.
It is understood that Greenhill Cogent advised on the transaction.
Terra Firma Capital Partners II is a €2.1 billion buyout fund with a Western Europe focus. Investors include Canada Pension Plan Investment Board with a C$150 million ($120 million; €103 million) commitment and North Carolina State Treasury, with a $98 million commitment, according to PEI data.
CCP VII is also a Western Europe-focused fund, which hit final close on €2.7 billion. Investors in the fund include New York State Teachers' Retirement System, with a contribution of $66 million, and Rhode Island State Treasury, with $15.4 million.
The Blackstone unit's Strategic Partners Orchis Acquisitions was registered in Delaware in May and appears to have been formed especially for these transactions.
Norinchukin has been an occasional seller in the secondaries market. In February 2016 it sold a tail-end stake in Tishman Speyer European Real Estate Venture VI to Landmark Partners. Tishman Speyer European Real Estate Venture VI is a €1 billion real estate fund that closed in May 2007, according to PEI data.
Asian sellers account for only around 10 percent of assets sold in the global secondaries market, the equivalent of $2 billion to $3 billion, Axiom Asia Private Capital managing partner Alex Lee told Secondaries Investor in March.
According to research by Greenhill Cogent, 2016 had a decrease in sales from Asian financial institutions as divestments related to regulatory requirements tailed off. GP-led deals increased considerably in 2016, accounting for 40 percent of Asian deals by number and 50 percent by transaction volume.
Strategic Partners, Norinchukin and Greenhill declined to comment.
Pantheon Ventures' global private equity secondaries head is standing aside after 13 years in favour of Matt Jones and Rudy Scarpa.
London-based Elly Livingstone will shift his focus to fundraising and investment, according to a statement. He remains a member of the secondaries investment committee and will retain his seat on the international investment committee.
The head of secondaries role will be split between London-based Jones and New York-based Scarpa, reflecting "the global coverage of [our] clients, professionals, investments and market network", the statement said.
“Designating joint leaders based in two of our key regional markets strongly affirms our commitment to and confidence in the growth and continued long-term success of our private equity secondaries business, while recognising its global profile," said Pantheon’s head of investment, Chris Meads.
Jones has been with Pantheon since 2001 and became one of its youngest ever partners at the age of 35. He moved to the US in 2007 to help build the firm's New York office before returning to London late last year.
Scarpa joined Pantheon in 2007 and has been involved in originating, structuring and transacting secondaries deals, and spearheading the development of the firm's New York office. He was previously a partner with Coller Capital in its New York office.
Portfolio Advisors has hit final close on its sixth real estate fund of funds, the firm announced in a statement.
Portfolio Advisors Real Estate Fund VI has raised $485 million to be invested in secondaries, primary and direct co-investment transactions in the private real estate sector, the statement said. The fund's original target and hard-cap has not been disclosed.
Seoul-headquartered Crownrock Partners acted as a placement agent on the fundraising, according to a filing with US Securities and Exchange Commission.
Around 80 percent of commitments were from investors that had invested in previous Portfolio Advisors funds, the statement noted. According to data from sister publication PERE, this includes Oklahoma Firefighters & Retirement System with a $25 million commitment and Missouri Local Government Employees' Retirement System, with $30 million.
The fund has purchased 26 interests on the real estate secondaries market, and made five direct co-investments and eight primary commitments. The fund is already 80 percent invested, according to the statement.
The fund has been in the market since March 2015 and held a first close on $132.9 million in April 2015, Secondaries Investor reported.
At the end of July the Connecticut-headquartered firm held an $835.9 million second close on dedicated private equity secondaries vehicle Portfolio Advisors Secondary Fund III, according to SEC filings. The firm is targeting $1 billion for the fund, Secondaries Investor reported in October 2015.
A bank regulator is to launch a public consultation on how the Volcker Rule is working, in what could be the first step in dismantling the regulation.
The Office of the Comptroller of the Currency, which oversees US national banks, will consult with those affected by the rule limiting a bank’s private equity investments to 3 percent of Tier 1 capital.
Speaking to Congress in June, Keith Noreika, acting head of the OCC, said the Volcker Rule provides a “practical example” of how conflicting messages and inconsistent interpretation can “exacerbate the regulatory burden by making industrial compliance harder and more resource intensive than necessary.”
The OCC will conduct the consultation without the help of the other four regulators that co-wrote the rule, although any revisions would have to be agreed by all five under current law.
Consensus that the Volcker Rule is “imperfect” and needs simplification has emerged from various quarters within the Trump administration and beyond. The Treasury Department recommended in June that the current definition of covered funds – in which bank investments are restricted – was too broad, while ex-Federal Reserve governor Daniel Tarullo said there was scope to reform the rule because it is “damaging market-making activities” at banks during his exit interview.
The Financial Stability Oversight Council discussed “recommendations” on the rule during a closed-door meeting on Friday, but no details have emerged. It is the second time the rule has been discussed by the group in the past three months, as reported by pfm.
Last week, the Federal Reserve Board issued guidance on a two-year extension available to banks divesting seeding investments to private equity or hedge funds.
Verdane Capital, a Swedish direct secondaries specialist, along with 16 other shareholders, has sold its stake in sensor technology developer Exensor, the firm said in a statement.
The buyer is Bertin Technologies, a subsidiary of Euronext Paris-listed engineering company CNIM Group. Due to regulations around the publicly listed buyer, Verdane was unable to disclose financial information.
The transaction closed on 31 July, with EY acting as lead financial advisor to the selling shareholders and Vigne providing legal advice.
Verdane Capital first acquired the company in 2013 through its SKr1.5 billion ($184.9 million; €156.7 million) Fund VII, when it picked up 100 percent of the remaining assets in 2000-vintage Nordic Venture Partners I, a venture capital fund managed by Denmark-headquartered Nordic Venture Partners that focused on regional ICT companies. This was the ninth deal done by Verdane VII.
There were three other assets in that fund: Helsinki-based life sciences technology company CRFHealth, which it exited in 2014; Danish media technology firm Saxotech, which merged with three other companies to create Newscycle, still part-owned by Verdane; and video streaming specialist Octoshape, which was exited in 2015.
At the same time, the firm took over management control of Nordic Venture Partners II, the 2004-vintage, €115 million follow-up venture capital fund. According to Norwegian public records, Verdane holds a 24 percent stake in the fund.
Verdane's latest flagship fund is Verdane IX. It is one year into its investment period and around one-third deployed, Secondaries Investor understands.
San Bernardino County Employees' Retirement Association's private equity bucket, which includes sizeable commitments to secondaries funds, returned 7 percent gross for the second quarter.
The Southern California pension fund's return for the three months ending 30 June beat its benchmark for the Cambridge Associates Global All Private Equity, according to documents for Thursday's upcoming board of retirement meeting. The Cambridge benchmark lags by one quarter and posted a quarterly gross return of 3.8 percent.
The pension has significant relationships with 26 private equity and private debt managers, with sizeable commitments with SL Capital Partners, Partners Group and Pathway Capital Management. Among its top performing investments are Industry Ventures Fund V, which returned an IRR of 32.2 percent, Apollo Investment Fund VII, which returned 24.19 percent, and Tennenbaum Energy Opportunities Fund, which returned 21.53 percent.
The pension fund as a whole posted gross returns of 2.6 percent for the quarter, barely missing its 2.7 percent benchmark, but year-to-date gross returns came in at 6.2 percent, meeting the fund index.
In February SBCERA was considering the purchase of a stake in Kayne Anderson Capital Advisors’ seventh energy fund from an “affiliate of the general partner”.
SBCERA also posted a 9.3 percent return for the first half of the year, a figure that beat the year-to-date Cambridge index's gross 6.7 percent return by 2.6 percentage points.
The private equity portfolio, for which the public retirement plan set a 16 percent allocation, posted one- and three-year gross returns of 15.7 percent and 11.2 percent, respectively. Five-year gross returns stood at 13.1 percent, while 10-year gross returns were 8.5 percent. Only the decade-long time frame posted returns below the benchmark, at 0.4 percentage points under.
One- and three-year gross returns were 13.7 percent and 5.7 percent, respectively. SBCERA's gross returns over five years was 8.8 percent and 10 years was 4.3 percent.
Pennsylvania State Employees’ Retirement System (SERS) has committed to two Asia Alternatives Capital Partners secondaries and co-investment vehicles, according to a statement after the pension fund's July board meeting.
The pension fund committed $50 million to Asia Alternative Capital Partners V, a fund of funds that launched this year seeking $1.3 billion to invest in Greater China, Japan, South Korea, India, South-East Asia and Australia.
The fund can invest up to 30 percent in secondaries and direct co-investments, according to documents from Minnesota State Board of Investment.
Fund V's predecessor, the $1.8 billion Asia Alternatives Capital Partners IV, delivered a net internal rate of return of 10 percent and a return multiple of 1.1x as of 30 September 2016, according to the Minnesota SBI documents.
Penn SERS has also committed $50 million to Penn Asia Investors, a separately managed account. Fund V and the SMA will focus on primary, secondaries and direct co-investments across Asia, primarily in growth and buyout capital with a minority share in venture capital and special situations.
San Francisco-headquartered Asia Alternatives has separately managed accounts with a number of pensions including New Jersey Division of Investments, which has a 2016-vintage, $300 million New Jersey Asia Investments III vehicle.
Government Pension Investment Fund of Japan has received proposals from 23 private equity firms in response to its first-ever call for applications for private equity, real estate and infrastructure managers, which it issued in April.
GPIF is recruiting private equity funds of funds targeting North America, Europe and Japan, and focused on a number of strategies such as buyouts, growth capital, private debt and venture.
The pension is working with Towers Watson Investment Services and Russell Investments Japan to carry out due diligence and the evaluation of managers.
While it is not clear in which way secondaries will play a part in GPIF's private equity portfolio, Japan-based industry sources have previously told Secondaries Investor that such funds are the logical place for Japanese institutions wanting to gain exposure to alternatives to invest. J-curve mitigation and the ability to evaluate managers before deciding to commit to their primary vehicles or through co-investments made secondaries the ideal starting point, they said.
The pension giant, which manages ¥144.9 trillion ($1.3 trillion; €1.1 trillion) of assets, saw no change in its private equity and infrastructure investments in fiscal 2016 – maintaining its ¥4.2 billion for private equity in partnership with International Finance Corporation and the Development Bank of Japan committing, as well another ¥96.4 billion for infrastructure deals alongside DBJ and the Ontario Municipal Employees Retirement System, it said in the report.
It posted returns of 5.9 percent or ¥7.9 trillion for fiscal year 2016, reversing its $52 billion investment loss in fiscal 2015 and its worst performance since the global financial crisis.
GPIF president Norihiro Takahashi attributed the pension’s positive returns to robust equity prices in Japan and abroad, buoyed in the second half of 2016 by “a more favourable economic environment”.
GPIF reported a marginal increase in its alternatives portfolio in fiscal 2016, from 0.06 percent in fiscal 2015 to 0.07 percent as at end-March 2017, which is still well below its 5 percent investment target, according to its latest annual report.
GPIF’s has been gearing up its alternatives capability in the past year in line with the practices of global pension funds. It set up a Stewardship and ESG division in October and started integrating ESG indices in its investments. GPIF also held two global asset owners’ fora to exchange ESG best practices with pension heavyweights, California Public Employees’ Retirement System and California State Teachers’ Retirement System as co-organisers. In addition, the pension fund also joined the UK 30% Club and the US Thirty Percent Coalition in November to demonstrate its belief in gender diversity.
Direct secondaries transaction volumes increased by 18 percent in the first half of 2017 to $11.9 billion, according to a midyear report by NYPPEX Private Markets, obtained exclusively by Secondaries Investor.
This was driven by a change in sentiment on the part of sellers, who have lower pricing expectations due to increasing concerns about "valuation, revenue growth and exits", the report says. This is mainly due to the performance of recent private equity-backed initial public offerings, particularly those involving unicorns (companies without a long track record valued at more than $1 billion).
"NYPPEX believes that significant change in shareholder sentiment has occurred in the last 12 months regarding unicorn evaluations, which has resulted in sellers lowering offer prices in the secondary market," the report noted.
The firm estimates that the discount on secondaries bids, calculated as a percentage of a company's valuation after its most recent capital raising, ranged from a 45 percent discount to 5 percent premium.
Recent months have seen a couple of disappointing IPOs, most notably by Snapchat owner Snap. The firm's share price has declined 18 percent since its IPO on 2 March and 53 percent from its record high.
Largely due to this softer pricing, NYPPEX has upped its estimate for secondary direct transaction volumes in 2017 to $23.8 billion from $19.8 billion as the temptation to hold on for a big public listing cools.
Looking at the broader secondaries market, the report found that the median bid for LP interests was up by 4.52 percent compared with the first half of 2016. June, however, saw a drop-off, prices reportedly peaking on 1 June before declining by an average of 2 percent-5 percent over the rest of the month.
"This was driven by buyers' concerns about the inability of the US Congress to pass healthcare legislation, and therefore, will be unlikely to pass tax reform in 2017," the report noted. "As a result, lower private equity valuations could occur in 2H 2017."
NYPPEX is a New York-headquartered secondaries private market advisory, trading and research firm.
Ardian has picked up a €300 million portfolio of infrastructure LP interests from Italian banking group UniCredit, according to a statement from the French investment firm.
The stakes are held in the two funds managed by F2i, the Italian infrastructure private equity firm, according to a statement from UniCredit. The transaction is expected to close in the third quarter, pending approval from F2i. The Italian bank said the deal would give it a gross profit of €90 million but it is unclear how.
As of March 2016, F2i's largest shareholders were Italy's two biggest banks, UniCredit and Intessa Sanpaolo, and state investment bank CDP, each of which holds 14.01 percent.
F2i has two, Western Europe-focused infrastructure funds, the second of which closed in July 2015 on €1.24 billion, marginally above its €1.2 billion target. Investors in the fund include Chinese Investment Corporation and National Pension Service of Korea, as well as an array of Italian institutional investors and endowments.
Ardian made the acquisition through its ASF VII Infrastructure secondaries fund, which had amassed $1.7 billion as of May, Secondaries Investor reported.
According to the firm's annual report, it carried out four infrastructure secondaries deals in 2016, including the $157 million acquisition of three LP interests from a US endowment in July, and the $226 million acquisition of a single LP stake from a sovereign wealth fund in June.
The Paris-headquartered firm’s previous infrastructure secondaries fund, ASF VI Infrastructure, which closed three years ago on $525 million, has deployed $1.2 billion including funds invested through co-investments. It has achieved an internal rate of return of around 50 percent, according to the report.
Timing is everything, as the saying goes. In secondaries, it can mean the difference between a successful deal and a failed one. We examined five key concerns for buyers and sellers when closing a transaction for the upcoming secondaries special in the September issue of sister publication Private Equity International. Here’s a sneak peek at two of them.
Buyers need to take account of the impact of carried interest on a fund they’re buying into, and its timing, on the underlying portfolio’s cashflows. If a fund is about to go into carry and catch-up, that can mean a gap in the cashflow for the secondaries buyer as the GP gets caught up. “You'd have to be very aware of that and think about the timing of the cashflows,” says David Atterbury, managing director at HarbourVest Partners. “People can get it wrong if they don't model right down to that level.”
Whether a fund will ultimately hit carry is also a concern, and buyers should be aware of the GP’s alignment, their motivation and ability to realise assets in a fund. This is even more pronounced when looking at a manager that only has one fund, as a buyer should be concerned about that team staying together, Atterbury adds.
Timing a deal between net asset value reporting dates and closing can be critical. It's in everyone's interests to secure a deal before the next set of net asset values comes out and potentially change the dynamics, says Mark McDonald, global head of secondaries advisory at Credit Suisse’s private fund group. As GPs’ reporting to their investors has improved substantially in recent years, it reduces the risk of surprises. But they can still happen and waiting too long to close a deal can result in information – such as expectations of an upcoming IPO or an adverse change in a portfolio company’s revenue – that changes the seller’s or buyer’s perspective on pricing and may put the whole deal at risk.
For buyers, closing a deal in a short a time as possible can sometimes be the key. This is especially true for secondaries firms that pride themselves on having high visibility into the funds they focus on, with buyers who are already investors in a fund having an edge over those who aren’t.
“They tend to have an early warning if there's a huge uptick in the NAV,” says Gabriel Boghossian, partner at law firm Stephenson Harwood. If buyers are covering a GP and its portfolio companies, and they know the fund’s NAV will go up, they will often push for an imminent close, he says.
On the flip side, it's also in the seller's interest to lock in a price because what can go up can go down. “You definitely get sellers who are so pleased with the price they've received, they're concerned that when buyers see the next NAV, they're not going to want it anymore,” Boghossian says.
For more on how fundraising cycles, distributions and macroeconomic wobbles can threaten deals, keep your eyes out for our secondaries special in September’s Private Equity International.
How have timing factors affected deals you’ve worked on? Email us: email@example.com
HarbourVest Partners has appointed a vice-president to its real assets team.
Based in the firm's Toronto office, Benjamin Wu is working on secondaries, directs and primaries in the real assets space, Secondaries Investor understands.
According to his LinkedIn profile, Wu started at HarbourVest in July after nearly four years at Borealis Infrastructure, the infrastructure co-investment and management arm of the Ontario Municipal Employees Retirement System. Prior to that he spent around three years working on direct investments for the private capital arm of Ontario Teachers' Pension Plan.
HarbourVest's Toronto office opened in April 2015 under the leadership of principal Senia Rapisarda. She joined from BDC Venture Capital, the VC arm of Business Development Bank of Canada, where she was responsible for establishing a Canada-focused direct and indirect investments team. At the time HarbourVest managed $1.5 billion on behalf of Canadian investors.
The appointment of Wu brings the Toronto team up to four people, with real assets principal Dan Buffery and Sophia Maizel, an associate who monitors Canadian partnerships and direct coinvestments, according to the company's website.
HarbourVest's Real Assets Fund III closed in April on $366 million, below its target of $500 million. The fund invests in a combination of traditional and complex secondaries transactions in the energy, power, infrastructure and natural resources sectors, complemented by an allocation of up to 20 percent in real asset primaries and direct co-investments, according to documents seen by Secondaries Investor.
It has an investment period of two to four years, an average management fee of 75 basis points based on committed capital, and carried interest of 10 percent "after generating a 7 percent Limited Partner Preferred Return".
Direct secondaries and GP-led processes accounted for a record proportion of transactions in the first half of the year, according to a survey by investment bank Evercore.
These two deal types accounted for one-third of the $27 billion in deal volume, up from 26 percent in the first half of 2016, according to the firm's H1 2017 Secondary Market Survey.
GP-leds accounted for 29 percent of the total and directs for 5 percent, representing $7.7 billion and $1.2 billion respectively.
The $27 billion in transaction volume represents a 58 percent increase compared with the first half of 2016 and puts 2017 on course to break the $47 billion record set in 2014, according to the report.
Transaction volumes continue to be dominated by the largest players" the top six buyers accounting for 50 percent; the top 14 buyers for 90 percent; and the top 22 buyers accounting for 90 percent of the $27 billion total.
On fundraising, the level of available dry powder stands at around $83 billion. Buyers plan to raise an additional $27 billion in the second half of 2017 and in 2018, 73 percent of which will be for private equity, 15 percent for real estate and 12 percent for infrastructure.
The top 17 buyers manage more than 80 percent of total dry powder in the market.
Evercore's survey was based on responses from 50 market participants.
Intermediate Capital Group has confirmed it raised $1.1 billion for its latest secondaries fund, three months after Secondaries Investor reported the firm had held the final close on the vehicle.
The London-based mezzanine-focused firm beat its $1 billion target for Strategic Secondaries II Fund, according to a statement. The fund is around 40 percent invested.
"Raising over $1 billion for our first blind-pool fund was a very gratifying achievement, and demonstrates the importance of fund restructurings in the private equity ecosystem," Andrew Hawkins, head of secondaries at ICG, said. "This is a growing market and we are pleased to offer a dedicated global fund to fulfill the need of investors.”
The fund was backed by institutional investors in Europe and North America, the firm said.
The fund's investments include the restructuring of EdgeStone Capital Equity Fund II and EdgeStone Capital Equity Fund III, which are managed by Toronto-based EdgeStone Capital Partners, Secondaries Investor reported in April. It also invested in the restructuring of VSS Communications Partners IV, a fund managed by Veronis Suhler Stevenson, according to a source familiar with the fund.
Strategic Secondaries II Fund has a 1.15 percent target management fee on committed capital, according to a March presentation on the firm’s website.
London-listed ICG manages €23.3 billion of assets in third-party funds, and proprietary capital, mainly in closed-end funds, according to the statement.
Portfolio Advisors has held an $835.9 million second close on its third secondaries fund, according to two filings with the US Securities and Exchange Commission.
Portfolio Advisors Secondary Fund III has raised $629.7 million through its main vehicle and an additional $206.3 million through an offshore fund, the filings reveal.
New Jersey-based Bhargava Wealth Management, Dubai-based Greenstone Group and Panama's Trium Capital International were placement agents for the main vehicle, with Greenstone Group the sole agent for the offshore vehicle.
Connecticut-headquartered Portfolio Advisors wants to raise $1 billion for the fund, Secondaries Investor reported in October 2015. The firm held a first close on $200 million that month, according to a filing.
According to minutes from the January investment committee meeting of Florida-based Munroe Regional Health System, PASF III aims to generate an internal rate of return of 15 percent to 20 percent over the life of the vehicle by purchasing investments at a discount to face value.
Munroe's commitment to the fund is undisclosed. Other investors in the vehicle include Missouri Local Government Employees' Retirement System, with a commitment of $75 million and El Paso City Employees' Pension Fund, with a $30 million commitment, according to PEI data.
PASF III's predecessor is a 2012-vintage that raised $910 million of its $1 billion target, according to PEI data.
In June Portfolio Advisors and HarbourVest Partners were among buyers of stakes distressed manager Black Diamond Capital Management's 2006-vintage fund, as Secondaries Investor reported. Portfolio Advisors acquired a roughly $20 million interest in an auction process run by Greenhill Cogent that closed in the fourth quarter of last year.
The US’s Federal Reserve Board has issued guidance on a two-year extension available to banks divesting “seeding investments” to private equity or hedge funds under the Volcker Rule.
The board said banks should apply for an extension at least 90 days before the one-year anniversary of a fund’s establishment and explain their plans to reduce their exposure, by redemption, sale, dilution or other methods, as well as meeting the Federal Reserve’s investment rules.
Banks can apply for an additional two years to make seeding investments in private equity or hedge funds compliant with Volcker. Seeding refers to a banking entity putting initial equity into a new fund to attract investors.
Volcker demands that once the fund containing a seed investment is one year old a bank cannot hold more than a 3 percent ownership stake in it, meaning banks may need to reduce their stakes in some of their private equity funds.
In a separate move in December, the Federal Reserve allowed banks to apply for a five-year extension on divesting of private funds assets dated from 1 May 2010, in line with the Volcker Rule.
Goldman Sachs is one bank that secured a five-year extension to divest such assets, having previously been told to sell its private fund stakes by the deadline of 21 July 2017, the last of three one-year extensions.
Earlier in July, Martin Chavez, the investment bank’s chief financial officer, said he expected a “recalibration on Volcker”, referring to the proposed Financial CHOICE Act, which would eliminate the rule.
Aquila Capital, an alternative investment firm active in fund and direct secondaries, has appointed a former BNY Mellon veteran to lead engagement on research and consultancy services, according to a statement.
In the newly created role, Ian Williams is also tasked with developing Aquila’s environmental, social and governance principles, and implementing these within the firms and as part of its investment strategy.
Williams held a similar role at New York-headquartered BNY Mellon for 11 years.
“Ian’s role as our representative for ESG principles complements his relationship function at Aquila Capital and enables us not only to incorporate ESG principles within our daily activities, but also enhances our ability to promote social responsibility and sustainable thinking at each level of the Firm and externally,” said Roman Rosslenbroich, chief executive and co-founder of Aquila Capital, in the statement.
In March last year Aquila was preparing to launch a €500 million yield-focused infrastructure strategy targeting a majority of investments in unlisted third-party infrastructure funds. The fund's strategy includes primary, fund and direct secondaries, directs and co-investment
The firm had previously partnered with research and advisory firm ECPI to offer sustainable investment opportunities to its investor in 2014. ECPI assessed the sustainability of potential real asset investments in relation to environmental protection and governance for Aquila. Aquila then offered the deals as co-investment opportunities to its investors.
ESG adoption is only set to continue, according to a joint survey by Adveq and the Chartered Alternative Investment Analyst Association, published in March. Almost 80 percent of respondents believed ESG will be more important three years from now.
Aquila Capital, which was established in 2001, is part of Hamburg-headquartered Aquila Group. It has nine offices around the world, including Zurich, London, Frankfurt and Singapore.
The group has €7.1 billion assets under management and invests in asset classes including private equity, infrastructure, renewables and real estate.
Deutsche Bank's entire secondaries team is spinning out into a new firm, Secondaries Investor has learned.
The firm is Glendower Capital, according to filings with the UK's Companies House, and counts among its employees senior executives of the German bank's DB Private Equity unit.
Glendower has a 17-member team and is a "privately held investment firm focusing on secondary private markets with a flexible and opportunistic investment approach", according to its website.
The firm operates from New York and London and identifies private equity secondaries opportunities with "asymmetric risk/reward profiles, offering enhanced downside protection and meaningful upside optionality", the website notes.
The filings list at least four of Glendower's partners as:
- Carlo Pirzio-Biroli, DB Private Equity's managing director and global co-head of secondary opportunities funds;
- Charles Smith, managing director and the other global co-head of secondary opportunities funds in the unit;
- Chi Cheung, managing director and head of Europe secondaries in the unit;
- Deirdre Davies, a director in the unit.
According to an investor source, Deutsche is "entering into an advisory agreement with Glendower Capital to provide continuous portfolio management to the secondaries opportunities programme of approximately $3 billion".
The spin-out will be effective from August and Glendower is 100 percent owned by five partners from Deutsche, the source added.
The move comes after two high-profile departures from DB Private Equity. In mid-July, Neuberger Berman announced it had hired Scott Koenig in New York to launch its real estate secondaries strategy. Koenig had been at Deutsche for 16 years and founded its real estate secondaries business.
In June, Jason Sambanju, Deutsche's Asia secondaries head, departed after three years in the role, as Secondaries Investor reported. Sambanju left Deutsche to launch Foundation Private Equity, a Singapore-based firm focused on investing in secondaries in Asian private equity.
DB Private Equity is investing its third secondaries vehicle, the 2014-vintage DB Secondary Opportunities Fund III, which closed on $1.7 billion. The unit has been active in fund restructurings over the past 12 months, including a transaction involving healthcare-focused Enhanced Equity Funds' 2005- and 2010-vintage vehicles, the restructuring of Swiss investor Zurmont Madison's 2007-vintage vehicle, and the restructuring of GMT Partners II, a 2006-vintage buyout fund.
Limited partners in SOF III include Kentucky Retirement Systems, with a $100 million commitment, and Austin Firefighters' Relief and Retirement System Public Pension Fund, with $10 million, according to PEI data.
Deutsche is no stranger to spinouts. In February 2016 the bank teamed up with Goldman Sachs Asset Management to buy the National Bank of Greece's private equity holdings, finalising the spin-out of NBG’s private equity unit. NBGI Private Equity, which invests in venture, growth capital, buyout and real estate funds in Europe and North America, continued to manage the funds and rebranded to Stage Capital last October.
Deutsche Bank declined to comment.
– Adam Le, Rod James and Marine Cole contributed to this report.
If you had the chance to buy Blackstone or KKR funds at a 50-60 percent discount to net asset value, you would take it. That’s what the opportunistic funds formed just after the financial crisis did, according to one secondaries buyer.
“They [opportunistic secondaries funds] were buying KKR, Blackstone at a 50-60 percent discount. And they did very well. Obviously, if you held the assets for a few more years they’d recover nicely.”
The crisis caused a jarring price dislocation that made it difficult to see the true value of private equity assets. Between June and November 2008 the average top bid on secondaries stakes as a percentage of NAV fell by 28 percent, hitting 61 percent at the end of November. Many buyers and sellers decided that to do nothing was the best option.
“Given that the outlook for the underlying private equity investments has deteriorated along with the overall economy, that change in pricing has had to be reflected in the secondary market because the general partners aren’t reflecting it in the valuations they’re holding the companies at,” then-managing director at Cogent Partners, Colin McGrady, told Private Equity International in January 2009.
But others realised the poor economic conditions presented an opportunity. F&C Private Equity, the fund of funds division of F&C Asset Management, responded by launching the secondaries-focused Aurora Fund. Before it hit first close on €30 million in December 2009, it had bought almost the entire private equity fund portfolio of distressed Icelandic bank Landsbankinn at “a very large discount to asset value”, according to its annual report. And it wasn’t just classically distressed assets which were going for a song.
By the end of the first half of 2010 prices had rebounded by 17.5 percentage points, according to data from Greenhill Cogent, as clarity on exit timings and portfolio values caused many investors who had been sat on the sidelines through 2009 to get back in the game. While a return to something like normality was welcome, some had done much better out of the crisis than others.
A CHILL IN THE AIR
No one is predicting a catastrophe quite as large as 2008, but the headwinds are blowing. Apollo, for example, in its marketing materials for the $23.5 billion-target Fund IX, says the continued weakness of European financial institutions and rising interest rates in the US make it “prudent to underwrite investments assuming the possibility of a near-term recessionary environment”.
What are the likely implications of recession for the secondaries market? And are buyers and sellers adjusting their strategies in preparation?
At the moment, the mood seems circumspect. Assets that might be considered underpriced are beginning to re-emerge after a period when decent discounts were hard to come by. But a clear picture of how the market will develop is hard to find.
“Attributing a single driving force to any given market trend is a dangerous game,” says Kate Ashton, partner at law firm Debevoise & Plimpton. “That said, predictions of economic uncertainty are having their effect. In the secondaries context, that has meant some spotting and targeting of bargain fund stakes, and a continued flow of fund restructurings. Nothing dramatic has happened yet, though. Like so much in the market at the moment, we’re in a bit of a wait-and-see phase.”
On the sellside, a significant number of secondaries buyers appear to have become sellers over the past 18 months. Ardian has offloaded some big portfolios, including the sale of $700 million of mainly tail-end buyout stakes to Strategic Partners in June. A 2016 report by secondaries advisor Campbell Lutyens found that three-quarters of the top 30 secondaries funds had sold portfolios of stakes they had themselves picked up on the secondaries market, several more than once.
That’s one way to look at it - that they are thinking it’s the right time to sell [secondaries buyers who are becoming sellers],” says Thomas Liaudet, a partner with the Secondary Advisory team at Campbell Lutyens. “It doesn’t apply to all of their assets, but they’ll do their work and conclude ‘that’s interesting at the right price, we can lock in our returns’. It doesn’t mean there’s going to be a downturn but it demonstrates how they might be thinking.”
On the buyside, there appears to be little evidence of firms gearing up for a potential drop-off in prices, in line with deteriorating macroeconomic conditions. If anything the investment period of secondaries funds is getting slightly shorter, from three to five years traditionally to an average of three to three-and-a-half. In tandem, firms are coming back to the market more quickly to raise larger funds.
According to one buy-side source, the fundamental mismatch between funds available and attractive assets still dominates thinking more than any macroeconomic concerns.
“In January there was $90 billion of dry powder and that figure is still going up,” they say. “There just isn’t enough dealflow.”
If the economy does take a turn for the worse, one effect is that it could accelerate the disparity between the largest secondaries funds and the rest. The relative return profile of secondaries compared with other asset classes suggests that it will remain attractive to investors and with so much dry powder around, particularly among the largest players, the need to do deals will remain. For smaller funds, however, things may be trickier.
“As with any downturn, there is always likely to be a liquidity impact on secondaries deals and fundraising,” says Alistair Sword, head of alternatives at broker dealer Tullett Prebon. “This will be felt most in the smaller, more esoteric or tail-end funds, just as it would be for small-cap names in the public markets. At that point the issues of vintage, size and strategy become more pertinent. What might be prudent housekeeping and better portfolio management now, may take on some aspects of distress and the commensurate effects on price, readiness to transact and ability to raise new funds.”