Imagine being forced to sell your house and offered a similar – but not identical – house nearby.
You might have made a net gain on the asset, so you can’t complain on that front. But what if you had planned to stay there for three more years? You are now faced with the associated costs of moving – agency fees, legal costs, stamp duty, removal costs, surveyors, mortgage arrangements. And you have to take time from your day job to look at the new house and manage the process. You would rather stay put.
The comparison will not be lost on LPs faced with certain GP-led fund restructuring proposals.
To recap: these processes are now entering the mainstream. They come in various shapes and sizes, each with their own dynamics, but in general they involve a GP, a fund with a few years on the clock, a secondaries buyer and an advisory firm coming up with a proposal to offer liquidity to the fund’s LPs.
Most notable recently was the plan mooted for Apax’s €11.2 billion, 2007-vintage fund, whereby LPs would either roll over into a five-year continuation vehicle or sell their stakes. The plan was officially shelved on Thursday last week after it became clear from discussions with the LP advisory committee that there would be insufficient investor support for it. Nordic Capital, which is mulling the same thing, will surely be watching the Apax situation with interest.
Over in Poland, meanwhile, Innova Capital is progressing a similar process on its fifth fund with HarbourVest as the buyer and Lazard as advisor. Investors in the 2010-vintage fund were given the option of selling their stakes at a premium or rolling over into a new vehicle with some new terms and reset carry.
From a distance these look like fair choices; if you want to reallocate capital elsewhere, cash out. If you want to realise the value in the portfolio, carry on.
However, a closer look reveals something more like a rock and a hard place.
For an LP with a small investment staff – as many have – being asked to roll over into a new fund is not as simple as ticking a box: there are frictional costs. Subscription documents need to be signed, incurring third party administration costs; a couple of hundred pages of limited partnership agreements to be reviewed; tax advice has to be sought (a sale at a premium may crystallise a tax obligation), side letters must be revised. If the carry is being paid and reset, then figures should be audited.
The costs may not be measured in millions, but as with the house sale analogy, they could have been avoided altogether simply by sticking to the original fund plan.
“One of the criteria that we absolutely had was, for those [LPs] that just want to ignore it, they have the option to ignore it and everything continues as they expected when they made their original commitment with us,” said Laura Coquis, investor relations partner at BC Partners, at an event last week. BC recently completed a high profile, successful GP-led process.
A question posed by one Apax investor (not an LPAC member) was why, when the fund is only in its first year of extension, could it not go down the fund extension route (which, to be fair to Apax, the firm now will). PE funds are structured as 10-year vehicles, but in fact the median lifespan of a private equity fund is 16 years once extensions are taken into account. This route provides LPs with a genuine “do nothing” status quo option.
The managing partner of a blue-chip private equity firm recently made this comment when PEI asked about these scenarios: “Any advisor will tell you: if you want to get LPs to take action, you need to force their hands.”
The arrival of fund restructuring in the private equity mainstream will be a long-term benefit to investors, but these processes are delicate balancing acts and need to work for all. If GPs find themselves trying to force LPs’ hands, then the spirit of partnership is compromised.
Stakes in Carlyle's European funds have traded hands with buyers acquiring interests in at least three of the Washington DC-headquartered investment firm's vehicles.
Access Capital Partners, French banking group Credit Mutuel and Ardian sold stakes in 2007-vintage Carlyle Europe Technology Partners II and 2014-vintage Technology III, and 2003-vintage Carlyle Europe Partners II and 2007-vintage Europe III, UK regulatory filings from October show.
Finnish investment manager eQ Asset Management picked up the stake sold by Access and Strategic Partners, which used its 2015-vintage Fund VII, acquired the remainder.
In September Secondaries Investor reported that Access had sold a portfolio of 17 fully invested western European mid-market funds to eQ, which raised a €137.5 million vehicle to purchase the assets.
The stakes Ardian sold were part of an $800 million portfolio held in the firm's 2010-vintage ASF V fund that Strategic Partners acquired in September. The sale represented nearly one quarter of the net asset value of ASF V.
Other transfers of European Carlyle fund stakes took place in early September with Neuberger Berman, disposing of its stakes in CEP II to Strategic Partners, the filings show. The interests were held in Neuberger's 2004-vintage NB Crossroads XVII and 2007-vintage NB Crossroads XVIII fund of funds vehicles.
Swedish pension fund AP2 sold a stake in CEP III to five separate HarbourVest Partners vehicles, with a majority going to Dover Street IX, the firm's 2015-vintage $4.8 billion flagship secondaries fund.
Pricing was undisclosed.
According to an investor presentation prepared by Carlyle in August, the 2003-vintage €1.8 billion CEP II has achieved a multiple of 2x and a gross internal rate of return of 43 percent. Its follow-up, the 2007-vintage €5.3 billion CEP III, has returned 2.2x and a gross IRR of 19 percent.
Carlyle, Ardian, Strategic Partners, HarbourVest and AP2 declined to comment. Access Capital, Neuberger Berman, eQ and Credit Mutuel did not respond to requests for comment.
Partners Group has appointed the head of its Denver office as co-head of its primary and secondaries unit.
Anthony Shontz, a 10-year veteran of the private markets firm, took over from Adam Howarth in September, a spokeswoman confirmed. Howarth becomes head of portfolio management Americas.
Shontz, who is a member of the unit's investment committee and has previous experience at Pacific Private Capital and Prudential Capital, will lead the firm's private equity integrated investments team for the region alongside Hal Avidano, who is based in New York.
The change comes three months after Partners combined its primary and secondaries businesses in order to streamline dealflow and further focus on its clients, as Secondaries Investor reported. Howarth and Avidano had become co-heads of the combined unit on 1 July.
Howarth was interim co-head of the unit while transitioning to the role of expanding Partners' portfolio management activities in the Americas, the spokeswoman said. He remains a member of the firm's private equity integrated investment committee.
Andreas Baumann, who is based in the firm's Zug headquarters, leads integrated investments globally.
Partners Group has $66 billion in assets under management, according to its website. Its latest private equity secondaries fund is Partners Group Secondary 2015, a €2.5 billion vehicle, according to PEI data.
The firm had also raised €1.2 billion in a first closing as of August for its latest real estate secondaries fund, as sister publication PERE reported. The fund has a €2 billion hard-cap.
Headway Capital Partners has exited its investment in a French animation studio from its 2012-vintage €175 million secondaries fund, the firm said.
Headway Investment Partners III, along with the other minority investors in Cyber Group Studios, was bought out by French investment firm L-GAM for a price representing a 2x multiple and 40 percent internal rate of return, the London-based firm added. The new investor's firepower will allow the studio, which makes animated films for children and families, to expand internationally.
Headway, which focuses on more complex secondaries and secondary-direct deals, bought a 10 percent stake in Cyber Group Studios in 2015, partner Christiaan de Lint told Secondaries Investor. The stake belonged to a local investor who invested in 2005 and who needed to divest as its fund came to the end of its life.
"We were a bridge between a fund that needed to sell and the natural exit [that has just taken place]," de Lint said.
Headway Investment Partners III is nearly fully invested, de Lint said. The fund is expected to achieve gross cash-on-cash returns of as much as 60 percent. Investors in the fund include Central Park Conservancy, a non-profit that accounts for 75 percent of the New York park's annual budget, according to PEI data.
In June, Secondaries Investor revealed that the firm's latest vehicle, Headway Investment Partners IV, was set to hit a first close on at least half its target. The fund launched in February and is aiming for €300 million, according to PEI data.
Asante Capital is advising on the fundraising.
Headway was founded in 2004 and invests in direct secondaries, structured secondaries, GP restructurings, co-investment secondaries and traditional LP positions, according to its website. It specialises in deals under €50 million, with a particular focus on western Europe and North America.
The Volcker Rule should be revised so that banks can invest any funds – including private equity – that do not engage in “stand-alone, short-term proprietary trading,” according to the chief executive of the American Bankers Association.
Rob Nichols said limiting the definition of a “covered fund” to those engaged primarily in short-term proprietary trading would better enable the rule to achieve its aim of ensuring stability in the financial markets. Banks private equity investments are restricted to 3 percent of tier one capital.
Compliance with Volcker had resulted in a mass sell-off of private equity assets by banks, including private markets fund stake sales.
“[It would] align the definition with the statute’s intent while excluding those funds that rely on Investment Company Act exemptions but do not engage in the activity that the Volcker Rule is aimed at proscribing,” he said in a letter to the governor of the US Federal Reserve System, Jerome Powell.
He added the definition should also be revised to enable banks to invest more in vehicles, including venture capital funds, which “provide programs for various areas of public welfare.”
“Applying the Volcker Rule to these funds is alien to the purposes of the statute,” he said.
The letter was written in response to Powell’s statement, made at a Reuters summit in October, that the Federal Reserve was committed to “revising and refining” the Volcker Rule regulations in order to make them “more effective, efficient and focused.”
“We believe that these changes [proposed in the letter] taken together with revisions to the proprietary trading restrictions, would achieve these goals by tailoring the regulations alongside congressional intent, thereby addressing systemic risk while encouraging safe and sound banking practices and facilitating economic growth,” Nichols said.
Proposals to amend the Volcker Rule have gained momentum over the past six months. The Financial CHOICE Act, which is being examined by US lawmakers, proposes scrapping the rule, while a consultation on its “breadth, efficacy, and compliance burden” for fund managers was launched in August by a banking regulator, the Office of the Comptroller of the Currency.
Glendower Capital, the Deutsche Bank spin-out, has hired four professionals who all have links to the investment bank.
New York-based Joshua Glaser has joined as partner with responsibility for client coverage and fundraising, according to a statement from the firm. He was previously a managing director at Deutsche Bank Asset Management, where he managed the fundraising of alternative investment products in the Americas. He was previously director of investor relations at secondaries firm Paul Capital.
Glaser is joined in New York by associate Doug O'Connell from Carlyle's real estate-focused fund of funds, Metropolitan Real Estate Equity Management. O'Connell previously spent two years with Deutsche's hedge fund secondaries team.
In London, Emilio Olmos joins as a managing director. Prior to that he was a portfolio manager at Abu Dhabi Investment Authority, where he spent five years focusing on secondaries transactions. He is another former Deutsche employee, having joined its secondaries team as an associate in 2007.
Louise Schoeman joins as vice-president of finance from London's Air Ambulance charity, where she was finance director. She worked with Deutsche Bank as a business manager between 2011 and 2013.
Carlo Pirzio-Biroli, managing partner and chief executive officer, said in the statement that 19 of the 20 team members are individuals that Glendower's management team had worked with closely during their tenure at Deutsche Asset Management.
Glendower was founded in August by five partners from Deutsche Bank Asset Management, as Secondaries Investor has reported.
Prior to spinning out, the team raised three dedicated secondaries funds with around $3 billion in commitments, which the Glendower continues to manage.
Verdane Capital, the Nordic direct secondaries firm, has acquired a majority stake in online jeweller Fashionable Development Europe, the ninth investment from its 2016-vintage fund, according to a statement from the firm.
Verdane bought shares in the Sweden-headquartered retailer, which operates under the brand name Safira, from its existing owners and made a primary capital commitment, partner Staffan Morndal told Secondaries Investor.
The size of the deal has not been disclosed.
Safira will now look to expand its footprint in the Nordic region and internationally.
Verdane Capital IX closed in July 2016 on SKr3 billion ($367 million; €313 million) after five months of fundraising, Secondaries Investor reported. Like all of Verdane's funds, it invests in entire investment portfolios, parts of portfolios and individual assets.
The fund is around 40 percent deployed including follow-on reserves, Morndal said.
Investors in Fund IX include Norway's state-backed private equity firm Argentum Asset Management, with a NKr9.8 million ($1.2 million; €1 million) commitment, according to PEI data.
The 2013-vintage, SKr2 billion Verdane Capital VIII made its final investments in May 2016. It picked up 23 investments through seven individual transactions, according to the firm's website. Investors in that fund include AP Fonden III and Finnish Industry Investment.
Verdane Capital has around €900 million in capital under management and has invested in more than 300 holdings over the past 14 years. The firm has 24 employees working out of offices in Oslo, Stockholm and Helsinki, according to its website.
European private capital markets have experienced a significant rise in the number of executives reporting base salary cuts in 2017, according to a report.
Heidrick & Struggles’ Private Capital Compensation Trends in Europe found that 15 percent of respondents reported a decrease in their year-on-year base salary in 2017, significantly higher than the 1 percent who announced a similar change last year. Similarly, 20 percent noted a decline in their bonuses in 2017, compared with 9 percent in 2016.
The proportion of executives reporting an increase to their base salary also fell to 33 percent, down from 41 percent last year. Bonuses were no exception to this slowdown, with the proportion of those receiving a larger sum falling to just 35 percent from 48 percent in 2016.
"I suspect that's reflecting employers feeling that Brexit introduces a risk of a recession,” Simon Havers, consultant at executive recruiter Odgers Berndtson, told sister publication Private Equity International.
“Therefore they're just looking to tighten their belts and make sure that their cost base is as tight as it can be going into a period of uncertainty. I don't think it's lost on continental Europeans that a cliff-edge, no-deal Brexit will affect everyone's economies."
Havers also attributed the decline in part to a reduction in deal activity and limited partners clamping down on excessive remuneration. “The fact that they have to consider is that the limited partners don't like to see members of the GP team getting rich on their annual cash and bonus, because it compromises the alignment of interest that comes from the idea that you get rich from your carry, not from your annual cash,” he said.
The decline saw Germany overtake the UK to become the most highly compensated market in Europe for managing partners and partners of private capital firms, according to the report. On a scale assessing total compensation as it relates to the UK, which is given a score of 100, Germany was ranked at 115 this year, up from just 86 in 2016.
Southern Europe and the Benelux region were home to the next best compensated managing partners and partners, with a rating of 82. This is compared with a rating of just 62 in France, the worst performance in Europe.
The report analysed responses from 516 executives working in European private capital, including those who raise and retain capital, those who invest capital and those who work to improve returns.
HarbourVest Partners is the proposed buyer in the restructuring of Polish private equity firm Innova Capital's 2010-vintage central and eastern Europe-focused buyout fund, Secondaries Investor has learned.
Investors in the €381 million Innova/5 fund had the option either to sell their stakes or roll over into a new vehicle managed by Innova, with some new terms and reset carry, according to three sources familiar with the deal.
The deal is worth around €100 million and has been managed by Lazard, Secondaries Investor understands.
Pricing was at an unspecified premium, according to one of the sources, and the LP vote was split nearly evenly between those who sold and those who remained. The deal has not yet officially closed, Secondaries Investor understands.
The initial call to vote went out to LPs on 1 August, according to one source, with 15 days given for a response. This date had to be pushed back due to the unavailability of certain continental European LPs.
Innova/5 closed in 2010 above its target of €350 million and made its final investment last summer, one of the sources said.
According to Innova's website, the fund has invested in 12 companies and made four exits. The portfolio's makeup includes 29 percent of its companies in the TMT sector and 20 percent in the energy sector, with consumer, construction, healthcare and financial services making up the rest.
Remaining assets in the fund include Slovenian building materials manufacturer Trimo, in which Innova holds a 94 percent stake, and Polish advertising company NetSprint.
Investors in Innova/5 include fund of funds manager 57 Stars, which committed $26.58 million, Aberdeen Asset Management and ATP Private Equity Partners, according to PEI data.
It is not clear how much net asset value is left in the fund.
Founded in 1994, Innova has invested almost €700 million across 10 countries in central and eastern Europe.
HarbourVest and Lazard declined to comment. Innova did not return a request for comment.
– Toby Mitchenall contributed to this report.
RCP Advisors has held a first close on its third dedicated secondaries fund, a month after Secondaries Investor reported the firm had launched the vehicle.
The Chicago-based firm has collected $26.8 million for RCP Secondary Opportunity Fund III, according to a filing with the US Securities and Exchange Commission. The fund's target is $425 million and its hard-cap is $500 million, as Secondaries Investor reported.
RCP III will acquire stakes of between $3 million and $30 million in lower- and mid-market North American funds that are more than 30 percent invested and range from $250 million to $1 billion in size.
According to the filing, based on a fund size of $500 million, management fees over the course of the fund will come to an estimated $43.75 million. Thirty investors have committed to the fund so far.
The date of first sale was September and the minimum commitment from an outside investor is $1 million, the filing notes.
A document from RCP outlining the firm’s strategy states the GP usually makes a commitment of around 10 percent of aggregate capital commitments and that the hurdle rate on its funds is between 10 percent to 15 percent.
RCP’s previous secondaries fund held the final close on its $425 million hard-cap in July 2013, above its $300 million target after 14 months of fundraising, according to PEI data.
Investors in RCP Secondary Opportunity Fund II include Carnegie Melon University, the Achelis Foundation and Clemson University Foundation.
RCP Advisors has $5.9 billion in assets under management across fund of funds, secondaries and co-investment funds, according to its website.
The firm did not return a request for comment.
State of Wisconsin Investment Board is expanding its interests in existing commingled funds through the purchase of stakes in eight vehicles for $231 million, sister publication PERE has learned.
Madison, Wisconsin-based SWIB invested a total of $608 million in real estate from 8 June through 1 September. Of that capital, $231 million went to purchasing additional stakes in eight real estate funds, a spokeswoman for the pension told PERE.
SWIB invested the most capital with Blackstone, buying into three of the firm’s real estate vehicles for a total of $69.3 million. The pension system purchased stakes in two of its most recent global opportunistic funds, Blackstone Real Estate Partners VIII and VII, and one US opportunistic separate account. SWIB had previously invested a total of $500 million in the two funds and another US opportunistic separate account, according to PERE data.
SWIB also invested $61.5 million with Westbrook Partners across the firm’s three most recent global vehicles, Westbrook Real Estate Funds VIII, IX and X. The pension system has invested an undisclosed amount in the value-added funds.
SWIB also bought stakes in two of Beacon Capital Partners’ latest North America-focused value-added vehicles, Beacon Capital Strategic Partners VI and VII. The system had originally committed a total of $225 million to the vehicles.
A spokeswoman for SWIB declined further comment.
SWIB has been an active seller on the secondaries market, disposing of buyout stakes in funds managed by Charterhouse Capital Partners, 3i, Graphite Capital, BC Partners and others. It is unclear whether this is SWIB's first acquisition on the secondaries market.
The pension system managed $6.1 billion in real estate as of 31 July, with 71 percent of its portfolio in core, 15 percent in value-added and 13 percent in opportunistic holdings.
Real estate secondaries transaction volume hit $4 billion in the first half of 2017, driven by large transactions and an increase in dedicated dry powder during the first six months of the year, according to a report from Greenhill Cogent.
“The market is on track to meet or exceed the record $7.5 billion of real estate transaction volume in 2015,” Greenhill noted.
Other public pension plans that have acquired real estate fund stakes this year include California Public Employees’ Retirement System. In May the US's largest public pension said it committed $75 million to consolidate its stake in CIM Urban Real Estate Fund, a vehicle to which it originally committed $125 million in December 2000, PERE previously reported.
Funds from vintages from 2012-16 represent the next "very big opportunity" in the secondaries market, according to a London-based partner at Lexington Partners.
Appearing on a secondaries panel at the British Private Equity & Venture Capital Association Summit 2017 in London on Thursday, Pal Ristvedt said the transition away from deals which "consist mainly of tail-end assets and GP restructurings" has already begun.
"[Fifteen years ago] we would get these portfolios that were only a couple of funds and there wasn't much differentiation with what we were looking at," Ristvedt said. "Today we have all types of sub-sectors of the private equity asset class, we have higher quality of GPs and much broader dealflow."
Laura Coquis, head of investor relations at BC Partners, who was also on the panel, said limited partner portfolios for sale now comprised a wider range of vintages.
"There are more larger LPs doing portfolio sales that include broader vintage years. They'll throw in our more recent fund as what they call a 'value driver' – at least they tell us that."
"There are more larger LPs doing portfolio sales that include broader vintage years," she said. "They'll throw in our more recent fund as what they call a 'value driver' – at least they tell us that."
Despite the clear prospects for growth, Ristvedt stressed the market is still far from being truly liquid. Turnover rates – the average amount of any vintage raised on the primary market that is sold on the secondaries market – are around 7 percent to 8 percent, he said.
"That means 92 percent of people don't sell," he said. "We're not really talking about a stock market here for private equity interests and that's probably the way we'd like to keep it."
Click here to read our five takeaways from the panel.
Returns for secondaries funds were up in the first quarter of this year amid a mixed picture for private asset classes, according to data from the Institutional Limited Partners Association.
The ILPA Secondaries Benchmark delivered a return of 3.1 percent in the three months to 31 March, compared with 1.9 percent in the final quarter of last year.
Of the 10 benchmarks under analysis, six produced better returns in the first quarter of 2017 than the previous one. The biggest riser was Asia/Pacific PE and VC which realised a net internal rate of return of 4.8 percent compared with 0.9 quarter-on-quarter.
The biggest decline was euro-denominated Europe PE and VC benchmark which declined to 3 percent from 8.1 percent.
The pooled net IRRs for secondaries across a quarterly, yearly, three-year, five-year and 10-year horizons were all lower than the ILPA All Funds Index, which benchmarks all strategies.
Secondaries have performed best across a five-year period, accruing an IRR of 10.1 percent.
The ILPA data is based on returns for 3,673 funds as of 8 August 2017.
Revolutionaries. That was the theme of yesterday’s British Private Equity & Venture Capital Association’s annual summit, emblazoned across the conference materials in arresting Soviet-style Constructivist design (this year is the 100th anniversary of the Russian Revolution).
If it’s tricky to think of a genuine link between Russia in 1917 and private equity in 2017, then maybe a discussion about secondaries – a section of the market that is at the forefront of dramatic change – could be the answer. Both the October Revolution and a number of this year’s GP-led secondaries transactions saw two sides in conflict over the status quo…
Executives from BC Partners, Lexington, Arcus Infrastructure Partners and advisory firm Rede Partners convened for a session to share their thoughts. Here are the five points we found most interesting from the 45-minute discussion.
1 BC Partners thinks all primary GPs should consider secondaries
Speaking about the firm’s $1 billion stapled deal with Lexington over the summer, BC’s head of investor relations management Laura Coquis said the firm was initially “incredibly apprehensive” about even putting together a deal unless it was convinced its LPs wouldn’t get burned.
“One of the criteria that we absolutely had was, for those [LPs] that just want to ignore it, they have the option to ignore it and everything continues as they expected when they made their original commitment with us,” Coquis said.
But, she added, all GPs should think about how they could use secondaries – as long as everyone winds up happy.
2 “Win-win-win” isn’t just marketing spiel
Primary managers aren’t going to go along with a secondaries proposal if it has a negative impact on their long-term investors…well, not all of them anyway. In BC’s case, several options were presented to the firm that didn’t support its investor base, Coquis said.
“They perhaps would have been good for us and good for the secondary investor, but we could not get comfortable that they would be good for those that would not want to participate, and so we dismissed them entirely.”
3 Primary managers need time to prepare for a secondaries deal
Making a deal work means putting the preparation in – both internally and with their LPs, according to Stephan Grillmaier, head of investor relations at Arcus. The London-based firm worked with Campbell Lutyens last year on a tender offer on its 2007-vintage fund, with Dutch pension manager APG leading a group of buyers to acquire €800 million worth of stakes in the vehicle.
“It didn't come as a surprise for the LPs, it didn't come as a surprise for us,” Grillmaier said, reflecting on the deal. Preparation, transparency and a competent advisor behind the scenes orchestrating the deal ensure a smooth transaction, he said.
4 PE becoming a more liquid asset class shouldn’t affect GP-LP alignment
As the market sheds its stigma, will it cause misalignment between GPs and LPs? Will managers just restructure funds if they are unable to make exits? No, according to Rede’s Yaron Zafir.
“If you think about the public market, you have people trading in companies in and out all the time, no one thinks that causes an issue for the performance of the underlying companies.” If anything, that drives performance of the underlying companies, he added.
5 The state of European secondaries is positive
A straw poll of attendees in the room found that almost 40 percent believed there will be “constant innovation with more differentiation and products”. Music to our ears.
Hours after the panel, we broke the news that Apax Partners had pulled its GP-led process after discussions with Fund VII’s LPAC. While we didn’t get the chance to ask panellists for their thoughts on this, we’d love to hear yours. Email us: email@example.com or @adamtuyenle
Apax Partners has cancelled plans to move assets from its 2007-vintage fund into a continuation vehicle after discussions with the fund's limited partner advisory committee, Secondaries Investor has learned.
The London-headquartered buyout firm notified investors on Thursday afternoon that following talks with the LPAC, the firm had concluded there would be insufficient demand from investors for the proposal on its €11.2 billion Apax Europe VII fund, according to two sources familiar with the transaction.
Apax had hired Campbell Lutyens to run a GP-led process on Apax VII, which has around €4.7 billion in net asset value across 15 portfolio companies, as Secondaries Investor reported in September.
Apax, the UK’s second-biggest private equity firm according to the PEI 300, had proposed that investors either cash out or roll over their commitments into a continuation fund with a five-year life.
The development is a blow to GP-led secondaries, which have gathered momentum in recent months. Market participants have been estimating a record year for deal volume with high quality managers including EQT, Nordic Capital and BC Partners all using the secondaries market for GP-led processes including stapled deals.
Investors in Apax VII include California State Teachers’ Retirement System, with a commitment of $526 million; Canada Pension Plan Investment Board, with C$500 million ($401 million; €338 million); and Oregon State Treasury with $199.50 million, according to PEI data.
The fund delivered a gross multiple of 1.7x and a net internal rate of return of 8.2 percent as of 30 June, according to a source familiar with the vehicle. The fund is in the first year of its extension, the source said.
Apax declined to comment. Campbell Lutyens did not return requests for comment by press time.
Cygnus Investment Partners, a Toronto-based firm that helps Canadian investors gain access to KKR funds, has branched out with a secondaries fund.
Cygnus Secondary Focus Fund LP is aiming to acquire "top-tier private and growth equity assets", according to a statement from the firm. It has a term of seven years as opposed to the usual 10. Managing partner Dan Geraci said this was because secondaries by their nature skip the first few years of J-curve and Cygnus will only invest in funds that are 50-100 percent deployed.
Secondary Focus is aimed at Canadian institutional investors, family offices and financial intermediaries, which can invest with as little as $250,000, according to the statement.
Geraci said that the fund does not have a target yet, but one will become clear once the firm has gauged the level of investor interest. The fund will hold a number of closes, with first close targeted for this autumn. It will be denominated in US dollars.
Morningside Capital Management, a Toronto-based tail-end secondaries specialist, advised Cygnus.
Formed in 2015, Cygnus's main business is giving Canadian investors low-cost access to the private equity, energy, infrastructure and real estate funds of KKR through a locally domiciled vehicle.
Each year it launches a new vehicle that mirrors what KKR has brought to the market, according to the firm's website. Its minimum buy-in is $250,000 for individuals and $1 million for institutions.
Law firm Kirkland & Ellis has made two secondaries lawyers partner as part of a promotion round of 97.
New York-based Jaclyn Rabin works on fund formation across an array of alternative asset classes and advises on secondaries and co-investment transactions, according to her LinkedIn page. She has been at Kirkland & Ellis since 2014, having spent two years in the investment management team of Paul, Weiss, Rifkind, Wharton and Garrison.
Paul Mysliwiec works in the corporate and investment fund teams of Kirkland's Chicago office. Prior to joining Kirkland he spent three years as a tax associate at Skadden, Arps, Slate, Meagher & Flom.
The promotions are effective from 1 October.
In August, Kirkland's London funds group brought in Anand Damodaran, a partner at Ropes & Gray, to work on secondaries stake sales; establishing private equity, real estate and hedge funds; negotiating contracts with fund service providers; and structuring carried interest and co-investment schemes, according to the statement.
A few months before that, it poached Sean Hill from Proskauer to work on structuring and executing fund transactions and private fund formation from its Boston office.
Kirkland & Ellis has more than 2,000 lawyers across offices in Beijing, Boston, Chicago, Hong Kong, Houston, London, Los Angeles, Munich, New York, Palo Alto, San Francisco, Shanghai and Washington DC.
Evercore's European head of secondaries and one of the investment bank's secondaries advisory unit's founding members is leaving the firm, Secondaries Investor has learned.
Nicolas Lanel, managing director and head of European private capital advisory, is retiring from the partnership and will no longer be officially with the firm by the end of the year, according to two sources familiar with the matter.
His next move is unclear.
In an email to clients dated 8 October and seen by Secondaries Investor, Lanel wrote: "I will be winding down my day-to-day management responsibilities with immediate effect although I will, of course, continue to support the team and our clients to ensure that all ongoing and near-term prospective mandates are successfully completed or transitioned by then."
Lanel noted he was "extremely proud" of what Evercore has achieved since he founded the business with Nigel Dawn in 2013.
Lea Lazaric Calvert, who joined Evercore in London in 2015 from UBS where she was involved in fund placement, will take over from Lanel, the email confirms. Lazaric Calvert will lead a team of 10 professionals including Francesca Paveri and Jasmine Hunet, both UBS alumni who between them have almost two decades of experience in secondaries advisory.
Lanel is a seasoned secondaries professional who established UBS's European secondaries advisory team in 2007, according to Evercore's website. He joined the firm with fellow UBS alumnus Dawn in 2013 to set up its secondaries business. According to a statement from Evercore announcing the launch at the time, the business would be owned by Evercore and key members including Dawn and Lanel would take minority stakes.
Since 2013 Evercore has grown its advisory business and last year tied with Greenhill Cogent in first place with $8 billion worth of deals closed, as Secondaries Investor reported in March.
Lanel's departure follows New York-based Sameer Shamsi, who left the investment bank in March, as Secondaries Investor reported.
In July Evercore hired Park Hill director Ryan Rohloff as a vice-president, based in New York. In London the firm has 10 professionals in its private capital advisory unit.
Evercore declined to comment.
– This story was updated to include comments from Lanel's departure letter and details of the London team personnel.
Montana Capital Partners is returning to market with its fourth secondaries fund focusing on niche and complex deals and will seek at least €400 million, Secondaries Investor has learned.
The Baar, Switzerland-headquartered secondaries firm is in pre-marketing mode for mcp Opportunity Secondary Program IV and has begun speaking to existing investors about the fund, according to two sources familiar with the matter.
Montana declined to comment on fundraising.
UK regulatory filings show Fund IV was registered with Companies House on 5 June.
Montana took 10 weeks to raise its previous fund, mcp Opportunity Secondary Program III, which beat its €300 million target to hold a first and final close on €406 million in the third quarter of 2015, according to the firm's website.
The fund attracted capital from 14 institutional investors including Swedish pension AP Fonden 3, Finland's Elo Mutual Insurance Company and Swiss pension La Collective de Prévoyance, according to PEI data.
Montana was founded in 2011 by two former Capital Dynamics executives, Marco Wulff and Christian Diller. The firm focuses on small and complex deals that are often sourced directly from the seller, according to its website.
There were at least 11 other Europe-headquartered firms seeking a combined $2.5 billion for secondaries as of early October, according to PEI data.
Schroder Adveq has acquired a bundle of tail-end stakes in UK private equity funds from various European sellers, regulatory filings show.
The firm used its its Adveq Mature Secondaries and BKMS vehicles to pick up interests in Doughty Hanson IV and V, Vision Capital Partners VI and Abingworth Bioventures IV. The respective sellers were Generali Capital Developpement, Montaigne Capital and Iena Holding for the Vision stakes and Quartilium via ACG Capital, according to the filings.
Pricing details were not disclosed.
The 2004-vintage Doughty Hanson IV raised €1.5 billion, according to PEI data. Remaining assets in the fund are Italian air freshener manufacturer Zobele and French manufacturer of concrete products KP1, according to firm website. Doughty rebranded to DH Private Equity Partners this year.
The 2007-vintage Doughty Hanson V raised €3 billion, according to PEI data. The remaining assets in that fund are compliance outsourcing firm TMF Group and oil & gas logistics firm Asco.
Vision Capital Partners VI raised €354 million in 2006. According to the firm's website there is one remaining asset in Fund VI: UK electronics and white goods seller BrightHouse.
Abingworth Bioventures IV is a 2003-vintage, $350 million fund focused on biotech and life sciences. Investors in the fund include Blackstone and Ontario Teachers' Pension Plan, according to PEI data.
Remaining assets in the fund include medical device manufacturer Broncus and Pixium Vision, which develops bionic vision systems for blind people.
Swiss private equity firm Adveq was acquired by London-headquartered Schroders in a deal completed in July. Adveq has raised around $133 million out of its $200 million target, according to PEI data.
Adveq and DH Private Equity declined to comment. Generali, Montaigne, Iena, Vision, Abingworth and Quartilium did not return requests for comment by press time.
Pantheon International Plc, Pantheon's listed investment vehicle, made six secondaries investments in the three months to the end of August in strategies including energy, transport and turnaround.
The London-listed fund of funds invested £50.5 million ($67 million; €57 million) in these deals, according to a monthly update published at the end of September. The transactions include:
- £9 million in a portfolio of North American buyout, growth and turnaround funds that was 91 percent funded at completion;
- £2.8 million in an Iberian mid-market buyout fund;
- £10.4 million in a North American mid-market buyout fund;
- £3.2 million in a European small buyout fund; and
- £13.7 million in a portfolio of five energy and transport assets
Secondaries deals accounted for 40 percent of PIP's £125 million worth of total investments during the period by value. The vehicle made 22 investments over the three months, including five primary commitments and 11 co-investments.
PIP's private equity assets stood at £1.5 billion as of 31 August, up 25 percent from £1.2 billion at the same point last year.
The vehicle is a subsidiary of London-based Pantheon, which had $36 billion in assets under management as of 31 March.
Hollyport Capital, a London-based tail-end secondaries specialist, has hit the hard-cap on its latest secondaries fund and has hired additional investment staff to help deploy the vehicle, Secondaries Investor has learned.
Hollyport Secondary Opportunities VI, which launched around the beginning of the year, and had an initial target of $400 million.
The vehicle is the first to be denominated in US dollars, Hollyport's previous five having been in pound sterling. John Carter, Hollyport's chief executive told Secondaries Investor the decision was made to attract US investors who appreciate the convenience of dollar-demoninated funds and their advantages when it comes to liability matching.
As with Hollyport's previous funds, Fund VI will build a portfolio of mature fund stakes with a highly diversified array of fund types, managers and geographies, for investment risk mitigation.
The fund has already invested in four deals, Secondaries Investor understands.
US and multinational endowments and institutional investors make up a considerable proportion of the $500 million.
The firm has also expanded its team this year, hiring six additional investment professionals in its London office.
Hollyport's funds have roughly doubled with most of its fundraises. Predecessor Fund V raised £187.5 million ($247 million; €210 million) in November 2015 after five months of fundraising, exceeding its hard-cap of £175 million, according to PEI data. Fund IV raised £75 million in 2013, exceeding it target of £50 million.
ICG Enterprise Trust, Intermediate Capital Group's listed investment vehicle, invested in both Funds IV and V, according to PEI data.
Hollyport was founded in 2006 and employs 18 staff, according to its website.
Florida State Board of Administration sold a portfolio of private equity and venture capital stakes to Ardian in the second half of last year, in a sale managed by Park Hill.
SBA has committed more than $1 billion to secondaries since 2010, according to PEI data. This was its fourth such stake sale, having offloaded portfolios to Goldman Sachs Asset Management in 2012, and Partners Group and Lexington Partners in 2014.
According to documents obtained by Secondaries Investor from the pension fund, the deal included stakes in 12 funds. The net asset value reference date is 30 June 2016.
Source: Florida SBA
Explorer Investments, a Portugal-focused private equity manager, is struggling to complete a stapled deal due to an absence of willing sellers, Secondaries Investor has learned.
The Lisbon-headquartered firm, which focuses on the Portuguese lower and mid-market, has been working with Greenhill Cogent on a tender offer process on its 2009-vintage Explorer III fund, according to two sources familiar with the deal.
Explorer chose two secondaries buyers last year to acquire stakes in the fund and commit to Fund IV, one of the sources said. Brightening prospects for the €135 million Explorer III, in line with the recovery of Portugal's economy, have resulted in fewer limited partners than expected wanting to sell their stakes, the source added.
The identities of the two secondaries buyers are undisclosed and it is unclear how much Explorer is seeking for Fund IV.
Some stakes did change hands in February, the two sources said. It is unclear whether any other investors will sell their interests in Explorer III.
The European Investment Fund is an LP in Explorer III, according to PEI data.
Explorer III launched in 2009 and closed on less than half its €300 million target in 2011, according to PEI data. The fund has made seven acquisitions and achieved its first exit in January, selling fast-moving consumer goods business Brandcare for a 2.5x gross multiple, according to Explorer's website.
Explorer Investments was founded in 2003 and has around €900 million in assets under management. Its debut private equity fund, the 2004-vintage Explorer I, raised €62 million, and its 2007-vintage follow-up closed on €200 million, according to PEI data.
The firm also has a 2013-vintage growth capital fund, which raised €80 million.
Explorer and Greenhill declined to comment.
Temasek Holdings, Singapore's state-owned investment company, has acquired stakes in buyout funds from the manager of Canada's largest institutional investors.
The firm picked up four entire stakes from British Columbia Investment Management Corporation in funds managed by Nordics-focused private equity firm IK Investment Partners, UK regulatory filings show.
The stakes were in Industri Kapital 2004, Industri Kapital 2007 and two interests from the 2013-vintage IK VII.
Pricing details were not disclosed.
bcIMC came to market in the first half of this year wanting to offload a portfolio of stakes in a process advised by Greenhill Cogent, three sources told Secondaries Investor. The size of the portfolio was between $600 million and $800 million, two of the sources said.
UK regulatory filings also show Lexington Partners picked up stakes in BC Partners' BC European Capital VII and BC European Capital VIII from bcIMC. This deal occurred separate to the Canadian pension's portfolio sale, according to a source familiar with the transaction.
The €825 million Industri Kapital 2004 held its final close in February 2005 and is fully realised, according to IK Investment's website. Industri Kapital 2007, which raised €1.7 billion, holds one remaining asset, Dutch hydraulics firm DGI.
IK VII closed in October 2013 on €1.4 billion. Companies in the fund's portfolio include Evaq, which manufactures environmentally friendly waste water systems and dough products maker Cérélia.
According to data from Standard Life Private Equity Trust, the IK funds had achieved respective net multiples of 2.4x, 1.5x and 1.3x as of 31 March.
bcIMC sold the stakes that were held in bcIMC Private Placement (2004) Investment Corporation, bcIMC (WCBAF) Private Placement Investment Corporation, bcIMC Private Placement (2007) Investment Corporation and bcIMC Private Placement (2011 Parallel) Investment Corporation vehicles, the filings revealed.
bcIMC is a Canadian investment fund manager which has around C$135 billion ($108 billion; €92 billion) in assets under management, around 27 percent of which is allocated to alternatives, according to PEI data.
bcIMC, Temasek and Greenhill declined to comment.
– Adam Le contributed to this report.
Portfolio Advisors expects to hold at least two additional closes on its third dedicated private equity secondaries vehicle by year end as it nears the $1 billion target of the fund.
The Darien, Connecticut-headquartered private markets firm had raised $883.4 million for Portfolio Advisors Secondary Fund III as of August, according to a document prepared by advisor Hamilton Lane for Pennsylvania Public School Employees' Retirement System.
The PSERS board approved a commitment of up to $125 million to PASF III – its first to a Portfolio Advisors fund – and recommended creating a discretionary separately managed account for PSERS to "invest additional capital to exploit market dislocations if and when they occur", on 5 October, according to the pension's website.
Portfolio Advisors will invest the equivalent 2 percent of LP capital, or at least $20 million, alongside the fund.
Details of PASF III's terms and strategy were also outlined in the document. The fund offers LPs a 10 percent "contingent performance allocation" that applies to net gains and is distributed to the GP after the investor's funded capital commitment is returned, and a 10 percent preferred return on invested capital.
The fund, which has a $1.5 billion hard-cap, will make equity investments between $5 million and $200 million across as many as 50 deals. No single investment will account for more than 20 percent of the fund.
Around one-quarter of the fund will focus on venture and growth strategies, 10 percent to distressed or special situations and another 10 percent to "opportunistic strategies based on market dynamics." Co-investments will comprise 15 percent of the fund.
Portfolio Advisors will not use leverage in its transactions, with the exception of a short-term credit line, the document noted.
It is unclear whether the SMA will focus on secondaries and how much PSERS will commit to the vehicle.
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.
Investors who have committed to PASF include Missouri Local Government Employees' Retirement System with $75 million and El Paso City Employees' Pension fund with $30 million, according to PEI data.
Portfolio Advisors declined to comment.
This week it emerged Lexington Partners was the majority buyer alongside Goldman Sachs Asset Management and a group of other buyers in a strip sale involving Warburg Pincus’s 2012 flagship vehicle, as the Wall Street Journal reported.
Sources told Secondaries Investor a roughly $1.2 billion slice of Asian assets from the fund, made up of stakes in 29 Asian companies, have been moved into a new vehicle named Warburg Pincus XI (Asia). The vehicle’s terms are different to those of the original fund and we understand at least one of these is quite surprising.
Leverage wasn’t used in the deal, either in the form of third-party acquisition financing or deferred payments, and while Lexington was the majority buyer, a mix of smaller secondaries funds, pension funds and other investors also participated in the transaction.
The Warburg deal is the latest in a run of chunky, high-profile wins for Lexington in the past six months as it deploys its 2014-vintage, $10.1 billion Lexington Capital Partners VIII.
Over the summer it emerged the firm was picking up the private equity portion of a roughly $2 billion private assets portfolio that Harvard Management Company had brought to market in the first half. More recently it inked the $1 billion stapled deal that helped BC Partners move toward the final close on its 10th flagship fund, as we reported in August.
It is not clear whether this represents an increase in deployment pace for the firm, which declined to comment for this piece, or business as usual, albeit in headline-grabbing deals.
What we do know is there is an additional incentive for the firm to crank up its deployment rate. With Lexington’s Fund VIII now between 60 percent and 80 deployed, according to sources, it is – or at least will be very soon – in marketing mode.
At the top of the secondaries food chain, Lexington competes with a handful of giants for LP capital, and one giant in particular: Ardian. It wouldn't be surprising if the Paris-headquartered firm launched ASF VIII in the next 18 months seeking at least $10.8 billion – the size of its latest vehicle – and Lexington would be well advised to get on the fundraising trail before Ardian comes back to market.
The two biggest secondaries firms seeking capital from LPs at the same time would make fundraising nothing short of “awkward”, one source noted.
The fundraising market continues to be heated and no one knows how long this will last: a point surely not lost on the firms in question.
Are buyers deploying capital quickly so they can take advantage of the hot fundraising market? Email us: firstname.lastname@example.org or @adamtuyenle
The Institutional Limited Partners Association added a further 23 limited partner and general partner endorsers of its reporting template in the third quarter.
Among the 20 additional LP users are New York City Police Pension Fund, Kentucky Retirement Systems and Varma Mutual Pension Insurance Company, which are all investors in secondaries funds.
New York City's secondaries commitments include Ardian's ASF VII fund, KRS's include Deutsche Bank's SOF III fund and Varma's include HQ Capital's Auda Secondary Fund II, according to PEI data.
There are now 140 total users: 90 LPs, 22 GPs and 28 service providers, according to a statement from ILPA.
Published in February 2016, the ILPA fee reporting template is designed to increase transparency around the fees and expenses private fund managers charge clients.
GP adoption has been slower than LP take up, but this should improve as LP demand drives GPs to use the template, said Emily Mendell, ILPA’s managing director of communications.
“As more LPs endorse and require the completion of the template from their GPs, the more this number will rise,” she said.
“There has been an uptick in adoption of the reporting template by GPs. Based on queries to our members who have endorsed the template, we estimate that at least 200 GPs are completing the template when asked by their LPs.”
This year the Pension Consulting Alliance said adoption rates for the template had been “disappointing,” and that ILPA was working to improve this by partnering with service providers to automate the solution.
“We are working with third-party providers on solutions which will automate template reporting. That is going well, as more third parties are providing these solutions,” said Mendell.
SS&C Advent, a software unit of the fund administrator, announced its partnership with ILPA in the third quarter, offering an automated version of the template to users of its Geneva World Investor platform.
Fund administrators Gen II and Citco have already launched template-friendly platforms designed to simplify the transfer of the data between LPs and GPs. According to ILPA, firms including PEF Services and Colmore are also working on platforms, as pfm reported in June.
Strategic Partners paid close to par for a portfolio of stakes held worth around $800 million in Ardian's 2010-vintage secondaries fund.
The Blackstone unit acquired the stakes held in Ardian's AXA Secondary Fund V at a 2 percent discount to December net asset value, according to an investor document seen by Secondaries Investor. The portfolio represents around a quarter of ASF V's NAV and is made up of more mature assets, the document shows.
UK regulatory filings show Strategic Partners used its 2015-vintage $7.5 billion Fund VII to acquire the stakes, which include Carlyle Europe Partners II and Carlyle Europe Partners III.
The $7.1 billion ASF V launched in December 2010 and closed in August 2012, exceeding its target by $3.6 billion, according to PEI data. The fund delivered a since-inception net multiple of 1.67x and a net internal rate of return of 18 percent as of March, as Secondaries Investor reported in September.
According to an investor presentation prepared by Carlyle in August, the 2003-vintage €1.8 billion Carlyle Europe Partners II has achieved a multiple of 2x and a gross internal rate of return of 43 percent. Its follow-up, the 2007-vintage, €5.3 billion Europe Partners III, has returned 2.2x and a gross IRR of 19 percent.
Investors in ASF V include Florida State Board of Administration with a $100 million commitment, New York City Fire Department Pension Fund with $40 million and Pennsylvania State Employees' Retirement System with $75 million, according to PEI data.
This is not the first time Ardian has sold from its ASF funds. In March, Canada Pension Plan Investment Board emerged as the buyer of a portfolio of pre-crisis private equity stakes held in Ardian's 2006-vintage secondaries vehicle worth around $1 billion, and the firm also brought stakes held in its first three secondaries funds to market in the second half of last year.
Ardian has also sold to Strategic Partners previously: in May the firm offloaded around $700 million in tail-end stakes held in its AXA Private Equity Fund of Funds II, AXA Primary Fund UK III and AXA Primary Fund Europe III, as Secondaries Investor reported.
Ardian declined to comment. Strategic Partners did not return a request for comment.
Boston Retirement System wants proposals from investment managers to help it invest $45 million in private markets, including secondaries.
The search is targeting funds focused on "secondaries, mezzanine, distressed debt, venture debt and special situation/turnaround", according to an announcement on the website of investment consulting firm NEPC.
It made the same call 10 months ago for a $40 million mandate.
Eligible candidates must be raising a closed-ended fund with a final closing date no earlier than 31 December 2017, with preference given to to those that have raised "at least two prior funds and will be raising at least $250 million in the current fund", according to the announcement.
Existing managers are encouraged to apply.
Submissions must be in no later than 2pm Eastern time on 31 October.
Boston Retirement System is 5.1 percent committed to private equity against a target of 7 percent, according to PEI data.
The pension already has some exposure to secondaries: it has regularly invested in Lexington Partners' secondaries funds including LCP VII and VIII, as well as the firm's second mid-market secondaries vehicle. Boston also committed to the 2007-vintage W Capital Partners II fund.
Boston has around $4 billion in assets under management, according to PEI data.
Earlier this year sister publication private funds management launched its search for the rising stars of the private funds legal world. Trusted contacts, industry participants and the law firms themselves nominated both colleagues and peers, and in total we were sent 129 profiles of high-achieving lawyers under the age of 40 based around the world.
Competition was stiff, which made the judging process challenging. Nominees were whittled down to a final list of 30 based on their career progress, their client base, notable work to date and their X Factor – many of those on the list today are engaged in good-will work outside of their funds practice.
The list follows, with notable secondaries-focused professionals including MJ Hudson's Ted Craig and Campbell Lutyens' Mateja Maher.
We’re sure you’ll agree, each and every one of them deserves to be there.
Click here to view the list.
Park Hill has named Jon Costello as its head of secondaries advisory as former head Larry Thuet becomes vice-chairman at the advisory firm, Secondaries Investor has learned.
Pablo Calo has become head of secondaries advisory international, according to an internal memo obtained by Secondaries Investor. It is not clear whether they have become co-heads of the unit.
New York-based Costello joined Park Hill in the second half of last year from Morgan Stanley Alternative Investment Partners in the wake of fund restructuring expert Andrew Caspersen's departure.
Costello and London-based Calo will "lead secondary advisory in sourcing, strategy and execution and will continue to expand the cross-business collaboration within Park Hill and across the firm", according to the memo, dated 19 September.
Thuet, a founding member of Park Hill, will mainly focus on client coverage and origination in secondaries, as well as opportunities for cross-business collaboration, the memo reads.
Costello has more than two decades of industry experience and prior to Morgan Stanley focused on secondaries at Philadelphia-headquartered investment firm Susquehanna International. He had previously led SSG Capital Advisors’ secondaries advisory business prior to joining Morgan Stanley, as Secondaries Investor reported in August last year.
In his new role, he will also join Park Hill's management committee, according to the memo.
Calo joined Park Hill in 2013. He was a managing director with PineBridge Investments and head of its European private equity secondaries business. Calo also held various direct investment roles at AIG Global Investment Group and AIG Capital Partners in New York, Buenos Aires and London.
Park Hill had lost its restructurings expert in March 2016 when Caspersen, an executive at the firm, was charged and arrested with attempting to defraud investors of $95 million. Caspersen pleaded guilty to securities fraud and wire fraud at the beginning of July, and was sentenced to four years in prison.
Over the past 12 months, Park Hill has advised on GP-led processes including the restructuring of Swiss private equity firm Zurmont Madison's sole fund and healthcare-focused Enhanced Equity Funds‘ two vehicles, as Secondaries Investor reported.
Park Hill declined to comment.
Newbury Partners has exceeded the target of its latest secondaries fund, six months after launching the vehicle.
The Connecticut-headquartered secondaries firm has amassed $1.3 billion for Newbury Equity Partners IV, according to a filing with the US Securities and Exchange commission.
It is understood the firm is yet to hold the final close on the fund.
Newbury held a first close on $700 million for the fund in June, two months after launch, and had set a $1.4 billion hard-cap on the vehicle, as Secondaries Investor reported. The firm had been eyeing a $1.2 billion final close by the end of June, a source familiar with the fundraise told Secondaries Investor at the time.
Investors in Fund VI include Swedish pension AP Fonden 3, according to PEI data.
The firm had previously collected $1.1 billion for its 2013-vintage Newbury Equity Partners III, which was backed by LPs including Australian pension Construction and Building Unions Superannuation Fund and Dutch pension Pensioenfonds PNO Media, PEI data show.
Dedicated private equity secondaries vehicles held final closes on a combined $3.2 billion in the third quarter of this year, up around one-third from a year earlier, according to PEI data.
Newbury was founded in 2006 and specialises in acquiring buyout, venture capital, special situations, mezzanine and funds of funds limited partnership interests. It focuses on small and mid-market stakes, targeting transactions up to $250 million in value with no minimum deal size, according to its website.
Newbury declined to comment.
Blackstone, Bain Capital and Advent International occupy the top three spots on a list of the 35 most sought-after general partners in the US large buyout market, compiled by Setter Capital.
According to the intermediary's The 35 Most Sought-After Managers on the Secondary Market, Blackstone Capital Partners funds were the most desired as of 15 September.
The report was published on 21 September.
Ninety-nine secondaries buyers expressed interest in Blackstone's flagship buyout funds, either by flagging a desire to buy or by pricing a given fund, according to the report.
There are 11 funds in the family, the most recent being the $17.5 billion, 2015-vintage Blackstone Capital Partners VII.
According to performance data compiled by the New Jersey Division of Investments, Fund VII has achieved a total value multiple of 1.02 as of the end of 2016; the 2012-vintage, $16 billion Fund VI a multiple of 1.47; and the $21.7 billion, 2005-vintage Fund V a multiple of 1.67.
In second place was Bain Capital's family of 19 flagship large buyout funds, which edged up from third place when the survey was last compiled in 2015.
Bain's funds had interest from 97 prime buyers when the list was complied.
The most recent is Bain Capital Fund XII, a 2017-vintage fund that raised $9.4 billion, above its $7 billion target, according to PEI data.
According to a presentation prepared by Portfolio Advisors for the Commonwealth of Pennsylvania Public School Employees’ Retirement System, 2014-vintage predecessor Bain XI had achieved a net multiple of 1.44 as of the end of 2016.
Rounding off the top three was Advent International's Global Private Equity funds, which had 94 expressions of interest, helping the firm move up from fifth place in last year's table.
Advent's past three flagship funds-VIII, VII and VI-have achieved respective multiples of 0.77, 1.40 and 0.77 as of the end of December 2016, according to data from the Minnesota State Board of Investment.
The rankings are largely based around Setter's Liquidity Ratings, by which the firm rates managers 'excellent', 'very good', 'good' or 'unrated', depending on the amount of interest shown by secondaries buyers. Around 1,300 buyers are tracked directly and through trading platform SecondaryLink.
The top 15 are:
||Previous ranking (compiled on 31 August, 2016)
||Blackstone Capital Partners
||Advent International Global Private Equity
||Apollo Investment Fund
||Hellman & Friedman
||New Mountain Capital
||Silver Lake Partners
||Warburg Pincus Private Equity
||KKR North American Funds
||Thomas H Lee Partners
Source: Setter Capital
Asante Capital Group, a London-headquartered private markets advisor and placement agent, has added a secondaries advisory to its operational capability, Secondaries Investor has learned.
The firm, which has focused on primary fundraising, is positioning itself to advise on limited partnership stake sales and complex processes in the mid- and upper-market and is preparing to build a team of 10 professionals, according to a source familiar with the matter.
The professionals will be split evenly between London and New York, and several of these will be new recruits, Secondaries Investor understands. It is unclear who will lead the team.
Asante has already advised on three LP interest sales, one of which involved a single asset. It is understood that the firm has also been mandated to work on two stapled deals involving mid-market European funds.
Asante is the latest private markets advisory firm to build-out its secondaries advisory capabilities. In July, Pablo de la Infiesta, the former European fund placement and secondaries head at Lazard, joined Moelis as head of the private funds advisory group in Europe, the Middle East and Africa. Chairman and chief executive Ken Moelis cited his "fundraising and secondary advisory network that extends into Europe and beyond" as a chief reason for the hire.
Asante Capital declined to comment.
LGT Capital Partners' 2016-vintage secondaries fund has invested around 14 percent of its current fund size, around 10 months after Secondaries Investor reported the firm had hit the target on the vehicle.
The Pfäffikon-headquartered firm had invested $384 million of Crown Global Secondaries IV as of 30 June, according to its results for the first half of the year. The $2.7 billion fund's deals include $355 million to 15 secondaries transactions comprising 54 private equity funds.
The largest of these had a fair value of $63.9 million, the results noted.
The remainder of the $384 million comprises $28.6 million of commitments to three primary private equity funds.
Crown Global IV, which started committing capital on 9 January, had agreed to two secondaries and one primary transaction last year. The fund predominately invests in secondaries and may opportunistically invest in primary targets and in co-investments acquired by way of a secondaries transaction, according to the results.
Compared with its 2012-vintage predecessor, the fund has shown a notable turn toward growth capital assets. The strategy accounted for almost one-third of investments as of the end of June, compared with 7 percent of Crown Global Secondaries III, which had committed $1.76 billion of its $2 billion total as of the same date.
These investments come at the expense of large buyout investments, which make up 7 percent of Fund IV's commitments, compared with 23 percent of its predecessor's. Small and mid-size buyout remains the most popular fund-type, accounting for more than half of Fund IV's investments and 52 percent of Fund III's.
China and the US each account for one-third respectively of Fund IV's exposure, followed by the UK and Germany, at 6 percent each.
The most common vintage year of assets in which Fund IV has invested is 2008, which accounts for 28 percent of the total, followed by 2014, which makes up 23 percent.
Investors in Fund IV include Employees Retirement System of Texas with a $200 million commitment and Luzerner Pensionskasse with an undisclosed commitment, according to PEI data.
LGT has been run by the royal family of Liechtenstein for more than 90 years. It has more than $50 billion in assets under management and employs 2,000 people across 20 locations in Europe, Asia, the Americas and the Middle East.
UBS has lost a secondaries advisory professional from its private funds group who spent around 18 months at the Swiss bank, Secondaries Investor has learned.
Orcun Unlu, who joined as a director in UBS's New York office in April last year from Citi, returned to his former employer in August, according to two sources familiar with the matter. Unlu's LinkedIn page states he is now involved in fund-level recapitalisations, restructurings, tender offers, strip sales, structured fundraising, financing and hedging solutions at Citi.
Prior to UBS, Unlu spent more than eight years at Citi helping to execute the bank’s regulation-driven exits from alternative investments, including the sale of its $1.5 billion stake in Metalmark Capital’s second fund and its sale of its emerging markets unit to Rohatyn Group.
At UBS, Unlu advised institutional clients on the sale of fund interests spanning private equity, venture capital, infrastructure, real estate and hedge fund positions, as well as management firms on structured solutions and fundraising, his profile shows.
Unlu was ranked 20th in Secondaries Investor's Young Guns of Secondaries 2016 list.
UBS and Citi declined to comment.
What types of deals are you seeing in European direct secondaries?
The direct secondaries market is quite heavily influenced by the overall exit climate. If the environment is challenging and people hadn’t been able to get good exits for two or three years, the pressure to realise assets in a different way mounts tremendously. If follow-on funding is also difficult, it exacerbates the situation.
But today in Europe we’re in a good environment. There are new funds coming to market, so there are good opportunities for follow-on funding, and investment bankers are talking about a record 2015, a very good 2016 and a 2017 that may be even better.
So what we don’t see much of is lock, stock and barrel portfolios of directs. If they do come to market, it’s because the quality of the assets is difficult.
That said, the overall European tech economy has matured tremendously. In the last five years we’ve seen the growth of a significant stock of mature late-stage companies doing between €20 million and €200 million in revenue that have been around for several years but may not, for good reasons, exit tomorrow.
Whenever that happens there are investors who need or want liquidity a bit earlier.
From your conversations with sellers, what are the main motivations to cash out at the moment?
This is not an investor selling all they have, rather one selling specific assets for a specific reason. Maybe they’ve been in one fund for too long, maybe they want to focus on a slightly different type of asset, maybe they’ve invested in too many companies and want to realise a few to focus their attention, maybe they have a different strategic opinion on where to go with the company than other investors.
The secondaries direct opportunity in Europe’s tech space is not to acquire x or y venture portfolio, but to provide flexibility to existing syndications.
How do you tap these opportunities? Do sellers ever seek you out or is it tend the other way around?
Our numbers say there are 1,700 [tech] companies in Europe that have raised more than €10 million in institutional capital. You can make contact with them indirectly, through the investor community, or you can reach out to them and educate them on the opportunity. Many companies are not aware that buying a secondaries position is pretty common and not necessarily a negative reflection on the company. It happens to the very best companies.
It’s a bit like selling public stock. Nobody would think badly about BMW if someone wanted to sell their stock!
Is pricing frothy across the board or are there clear pockets of value?
Across the industry, the question is what do you benchmark your pricing to? At the very top end of the market, so companies valued at a few billions of dollars, transactions almost happen at a premium. Let’s say somebody has invested in the last funding round at a valuation of €1 billion – when a secondaries trade happens, it generally happens at the same valuation.
But you aren’t buying the same stock. That last funding round is the most senior stock and probably has a whole set of preferences and rights that you don’t get with the older stock [that you are buying in the secondaries sale]. This is why we don’t really like these unicorn-type transactions. We think they are probably overpriced because of this dynamic.
If you move to the less well-known companies, which are not in the newspaper every day, and where a bulk of assets are anyway, then the last round of funding is generally a good benchmark and transactions happen at a moderate discount to that.
Then there’s a third bucket, where there’s a real issue with the company. They might be sound businesses but there’s real conflict between shareholders: they can’t go left and they can’t go right. With these companies the discount can be 50 percent or more. If you do your due diligence right, you are buying into a good company that just has a difficult shareholder situation.
You closed your latest fund in July on €174 million. How is it progressing?
We’ve done three transactions so far and have invested almost 20 percent of the capital, so we are going at a good pace. I’d say we have three or four companies in our crosshairs and we think we’ll probably pull the trigger on one of them before the year’s end.
These companies are all fairly mature. They’re in the bracket of €30 million-€100 million in revenue, which is large for us. We would probably deploy €5 million-€10 million for an initial ticket and that can grow to €20 million over time.
Can you see your funds growing in size as the European tech industry matures?
Angel rounds used to be €500,000 to €1 million, now they’re more like €2.5 million. So I think in a very natural way our investment tickets will grow.
In our first fund the typical investment was €3 million to €5 million, now it’s more like €5 million to €10 million. We will probably stay at roughly the same number of companies but will move up the amount somewhat. Don’t expect us to raise €350 million the next time around, but I think we will have something above €200 million.
Roland Dennert leads transaction origination activities at the Munich-headquartered direct secondaries specialist. He started his private equity career at 3i Group doing technology and mid-market buyout deals.
Lexington Partners' fourth mid-market secondaries vehicle accounted for the majority of capital raised for the strategy in the third quarter, which rose by more than a third year-on-year.
Dedicated private equity secondaries vehicles held final closes on a combined $3.2 billion in the three months to 30 September, compared with $2.4 billion a year earlier, according to PEI data.
New York-headquartered Lexington's Middle Market IV fund, which held its final close on Wednesday, raised $2.7 billion and accounted for more than 80 percent of the capital raised during the period.
Just four funds held final closes during the quarter, including Israel-headquartered Vintage Investment Partners' fourth dedicated vehicle and German direct secondaries firm Cipio Partners with its Fund VII. This compares with six funds holding final closes in the third quarter of last year.
Private equity secondaries funds have raised a combined $26.9 billion so far this year, slightly above the $25.1 billion raised by the end of September 2016.
Funds that have surpassed their targets and which are yet to hold a final close include Goldman Sachs Asset Management's Vintage VII fund, which had raised at least $7 billion as of June and LGT Capital Partners' Crown Global Secondaries IV, which had raised $2.7 billion as of 30 June, according to a filing with the London Stock Exchange. The vehicle's hard-cap is $2.8 billion, according to PEI data.
Buyers are benefiting from a resurgence in portfolio sales larger than $500 million in size this year as well as LPs selling positions amid uncertain macroeconomic conditions, according to Bernhard Engelien, a managing director at Greenhill Cogent. This is in turn helping firms deploy faster and return to fundraising, he said.
"We've seen a fair amount of de-risking sales – people, including secondaries funds, looking at the market and saying valuations are at an all-time high," Engelien told Secondaries Investor. "A lot of these older funds – 06, 07, 08 vintages – have a lot of public exposure and with a bit of uncertainty going forward, whether that's in the US or in Europe with Brexit, people think it may be not a bad time to take a bit of money off the table and either redeploy, or give it back to investors."
Deal volume this year should fall between $40 billion and $45 billion, he added.
||Lexington Middle Market Investors IV
|Vintage Investment Partners
||Vintage Investment Partners X
||Cipio Partners Fund VII
||eQ Secondaries Fund
As niche secondaries investors go, it is hard to look past Stafford Capital Partners.
The London-headquartered firm, which made its debut entrance this year to Secondaries Investor's SI 30 ranking of the biggest fundraisers, has held a third close on its eighth dedicated timberland fund of funds which will invest in secondaries. It has invested the whole of Fund VII vehicle in about three years, announcing full deployment through a $15 million deal in mid-September.
No surprise, then, that Stafford is also involved in agriculture. “We’re basically trying to replicate what has worked well for Stafford in timberland. That is low-risk countries, low-cost producers and focused on secondaries,” Bernd Schanzenbaecher, a managing partner at the firm, tells sister publication Agri Investor.
Stafford also announced its first investment in the asset class – a commitment to a permanent-crop fund, managed by a specialist US farmland manager. The pledge was made through a separate account on behalf of Swiss pension ASGA Pensionskasse, which invested $100 million with Stafford in May.
The account, which blends agriculture and timber, is a first for the firm. Schanzenbaecher said Stafford will be looking to raise an agri fund at some point. Separate accounts, in essence, are also a way for the firm to test the strategy.
Risk and reward
Schanzenbaecher is adamant that the sector offers a good pipeline for secondaries investors. He notes that Stafford has looked at 15 agri secondaries deals over the past three years. The firm has five prospective transactions in its database.
“Agriculture is today where timberland was 10 years ago,” he argues.
He cites a variety of reasons for why an LP might be looking to sell fund stakes. In one instance, the entity resulting from the merger of two insurance firms is looking to trim down the number of managers it works with; in others, LPs wanting to go direct are interested to divest.
What about returns? Net internal rates of return on underlying funds, Schanzenbaecher explains, tend to vary depending on the strategy. Row crops typically yield between 6 percent and 8 percent; permanent crops, once up and running, generate cash yields of 10 percent plus. Livestock and dairy funds, he says, generally sit in the middle, at 8 percent to 10 percent.
But that is not the whole picture. Stafford typically seeks to acquire agri stakes at a 10 percent to 15 percent discount to net asset value, which then translates into a 1 percent to 1.5 percent bonus in return – though, of course, price and expected return vary depending on the situation.
And sometimes Stafford finds merit in being flexible.
“We’re focused on doing co-investments and secondary investments, though occasionally we invest in primary funds because this gives us access to potential secondary deals in the future,” Schanzenbaecher concludes.
How big is the opportunity in agri secondaries? Let us know: email@example.com
Access Capital Partners, a Europe-focused private equity firm, has sold a partial stake in a 2007-vintage Norwegian buyout fund, continuing its run of divestments.
Oslo-headquartered secondaries firm Cubera acquired the stake in Reiten & Co Capital Parters VII using its Cubera VIII vehicle, according to a UK regulatory filing. Reiten VII is a €256 million lower- and mid-market buyout fund managed by Oslo-headquartered Reiten, according to PEI data.
The deal closed on 20 September, according to the filing.
It was sold through two Access Capital funds, Access NY European Middle Market Buy-out Fund LP and FRR Europe Petites Capitalisations PE 2007 LP.
The pricing of the deal or whether it is part of a larger transaction were not disclosed.
In early September, Access sold a portfolio containing 17 fully invested western European mid-market funds to Finland’s eQ Asset Management, as Secondaries Investor reported. At least two of the funds were Rutland Fund II and CBPE Capital Fund VIII.
Also in early September, one of Reiten VII's remaining portfolio companies Webstep announced that will launch an initial public offering on the Oslo Stock Exchange, with its first day of trading expected to be 11 October.
According to Private Equity International data, Cubera already owns a stake in Reiten VII, with Norwegian bank DNB ASA and eQ among the investors.
Cubera's funds focus exclusively on secondaries transactions in Nordic private equity funds, acquiring LP stakes, portfolios of stakes and participating in tail-end restructurings, according to its website. The Cubera VIII fund is a €405 million, 2016-vintage.
The firm has offices in Oslo and Stockholm.
Reiten declined to comment. Access Capital Partners and Cubera did not return requests for comment.
Enfoca Investments, a Peruvian private equity firm with around $700 million in assets under management, is pursuing GP-led processes on at least one of its older vintage funds, Secondaries Investor has learned.
The Lima-headquartered firm wants to give more runway to investors in its funds, according to four sources familiar with the matter.
Park Hill is running the process, Secondaries Investor understands.
Enfoca's strategy is to tap into high-growth sectors that are benefiting from the rise of Peru's middle class, according to its website.
Its debut buyout fund, Enfoca Descubridor 1, launched in August 2007 and raised $50 million in capital from local institutional investors, making it Peru's largest ever investment fund, according to a 2013 report by sister title Private Equity International.
The Peruvian government gave permission to increase the target on two occasions, helping the fund eventually raise 693 million Peruvian soles ($212 million; €179.6 million) by final close in March 2011. Investors include two of Peru's largest pension funds, AFP Integra and Prima AFP, according to PEI data.
The firm followed up in 2008 with Enfoca Andean Investment, a $110 million fund aimed at US institutional investors, Enfoca Discovery 1, an offshore fund aimed at global development banks, funds of funds and regional family offices. That fund launched in 2010 and closed in December 2011 on $158 million, according to Enfoca's website.
The three funds together have made eight investments, including in an airport services business, a private college and a television station.
Enfoca has made just one exit, divesting a controlling stake in hardware retailer Maestro in September 2014 as part of its $420 million sale to Chilean rival Sodimac. The deal generated a 20 percent internal rate of return, according to one of the sources. It is unclear whether the figure is net or gross.
Latin American secondaries transactions are rare: a report by advisory firm Evercore in January noted there were no sellers from the continent last year.
Enfoca did not return requests for comment. Park Hill declined to comment.
Terra Firma Capital Partners' managing director responsible for leading the buyout firm's push into direct secondaries has departed, Secondaries Investor has learned.
Michele Russo, one of three executives who joined the London-headquartered firm in April last year to boost sourcing, executing and managing investments, is no longer with the firm, according to a source familiar with the matter.
Terra Firma had unveiled plans in June last year to move into acquiring portfolios of assets from funds at the end of their lives, with Russo leading the charge, as Secondaries Investor previously reported.
Prior to Terra Firma, Russo, a Doughty Hanson and Lazard veteran, had established Milan-based Opera Private Equity to focus on direct secondaries in 2007.
In a June 2016 interview with sister publication Private Equity International, Justin King, Terra Firma's vice-chairman and head of portfolio companies, said Russo's joining the firm boosted its direct secondaries strategy.
"This will be very attractive because you have a mutual trap: businesses are trapped with owners who can't support their business plans," said King. "The owners are trapped because they can't support the business plan and don't want to exit, as they see themselves selling a lot of potential value. The GP is trapped because they are no longer collecting fees because the fund life has finished. Finally, LPs want liquidity. Michele has done that before and we think we are similarly well positioned to step in and take that GP role."
Alex Williams and Jyrki Lee Korhonen, who joined at the same time as Russo as managing directors, have also since left the firm. Williams, a former First Reserve executive, left in April while Korhonen, who led Terra Firma's Nordic investments, left in May for DH Private Equity Partners, as PEI reported.
Eight senior investment professionals remain listed on Terra Firma's website, including chairman and founder Guy Hands.
Russo's next move, and if he will be replaced, remain unclear.
A spokeswoman for Terra Firma declined to comment.
BC Partners is gearing up to close its 10th flagship buyout fund on between €6.5 billion and €6.7 billion, six weeks after it agreed a stapled deal with Lexington Partners, sister publication Private Equity International has learned.
The London-headquartered buyout firm told its investors at a meeting this morning that BC European Capital X, which has been in market since early 2016 and had an initial target of €7 billion, will close “shortly”, according to a source familiar with the matter.
BC Partners declined to comment.
The expected fund size is the same as its predecessor, which closed on €6.7 billion in 2012. Lexington acquired stakes from 22 limited partners in BCEC IX in a $1 billion stapled deal this summer, as reported by Secondaries Investor.
Of Lexington’s $1 billion investment, around $700 million was used to acquire stakes in Fund IX, while around $300 million was committed to BCEC X. The price paid for Fund IX stakes represented a 14 percent premium to 31 March net asset value.
Fund IX was delivering a net internal rate of return of 18 percent and a net multiple on invested capital of 1.6x at 30 June, according to the source. There are 17 investments remaining in the Fund IX portfolio.
Fund X held a first close on more than €4 billion in September 2016 and has since made six investments. These include bridal wear company Pronovias, managed hosting provider PlusServer and dental services provider DentalPro.
Fund X is following the same strategy as Fund IX, investing across Europe and selectively in the US. Up to a third of the fund can be invested in the US. The fund will also offer co-investment opportunities to its LPs; BCEC IX has deployed €3.6 billion in LP co-sponsorship and co-investment, according to the source.
Investors in Fund X include the California State Teachers’ Retirement System, Tennessee Consolidated Retirement System, Teachers’ Retirement System of Louisiana, three Colombian pension plans (Fondo de Pensiones Obigatorias Protección Mayor Riesgo, Fondo de Cesantia Protección and Fondo de Pensiones Obigatorias Protección Moderado), the American National Red Cross and the Retirement System of The American National Red Cross.
Lexington Partners' fourth mid-market fund has closed above target on $2.66 billion, according to a statement from the firm.
The fund has been in the market since September 2016 and was targeting $2 billion, data from Private Equity International show.
Of the total committed capital, over 40 percet was raised from investors in North America, 30 percent from investors in Asia and the Middle East, 20 percent from investors in Europe, and 7 percent from investors in Latin America, the statement says.
Investors in the fund include Taiwan Life Insurance with a $50 million commitment and Minnesota State Board of Investment with $100 million, data from PEI show.
The fund started investing at the start of 2017 and has made 15 secondaries investments managed by 25 different sponsors, worth around 22 percent of the fund's capital, according to the statement.
In March 2017 Secondaries Investor unveiled the terms of the fund after seeing documents compiled by Minnesota State Board of Investments.
The fund will focus on established US mid-market buyout funds that are less than 50 percent invested. It has a management fee of 1 percent per year of capital committed, which will be reduced to 0.85 percent after the investment period.
Lexington's management will commit 2 percent of the total size of Middle Market IV, or $40 million, whichever is lower, according to the documents.
The fee is calculated on the basis of the reported value of all secondaries investments and unfunded commitments.
A key-man clause stipulates that a temporary suspension period will occur if, for any reason, three out of the five key persons fail to devote enough time to the advisor and related entities for three consecutive months. The people identified are managing partner Brent Nicklas and partners Charles Grant, Marshall Parke, Lee Tesconi and Wilson Warren.
Lexington Partners closed its eighth flagship secondaries fund on $10.10 billion, above its target of $8 billion, in April 2015, according to PEI data.
The $2.5 billion stapled deal Ardian and Abu Dhabi's Mubadala Capital announced in April was the largest stapled transaction to date, and documents seen by Secondaries Investor give greater insight into the ins and outs of the deal.
The transaction saw the firm invest $1.75 billion in a portfolio of 14 secondaries stakes and 14 direct stakes belonging to the Abu Dhabi state-owned investment manager, and commit $750 million to a new $1.5 billion private equity fund that Mubadala will use to invest in directs, co-investments and fund commitments.
Ardian ended up acquiring two-thirds of the 14 funds and 14 directs for a price that represented a roughly 20 percent discount to net asset value, the documents say.
The 14 secondaries stakes held $554.2 million in net asset value as of 31 March 2016, while the portfolio of direct stakes was split between 11 that were one year or older, and three that were primary commitments made after the record date. These contained $985.2 million and $57.6 million in NAV, respectively.
The secondaries portfolio in which Ardian invested included stakes in Raine Partners I, a 2010-vintage growth/venture capital containing $105.6 million in NAV, and four Carlyle funds: Carlyle Partners VI (2012-vintage), Carlyle Partners V (2007), Carlyle Global Fin. Services Partners (2008) and Carlyle Asia Partners III (2008), which together had NAV of $242 million.
The direct stakes cover a number of industries, from music publishing to cage fighting, with top two assets EMI and Restaurant Brands International accounting for 35 percent of the direct portfolio's NAV. A more detailed breakdown of the stakes acquired is listed below.
|EMI Music Publishing
||Already controlled by Ardian
|Restaurant Brands International
||3G Capital Partners
By vintage, the whole secondaries portfolio is 84 percent focused on North America (by NAV), with Asia accounting for a significant 13 percent. Europe accounts for only 2 percent, South America for 1 percent.
By vintage, 26 percent of the assets acquired were of 2014-vintage and 26 percent of 2013-vintage. Nine percent of the assets by NAV are older than 12 years, and six percent of 2016-vintage.
The deal as a whole was funded with a 50 percent interest-free deferred purchase price to be repaid on 31 December 2017, with third-party leverage accounting for the remaining 50 percent. With the deferment taken into account, the multiple would represent 1.4x cost.
"Ardian's ability to underwrite 100% of the deal, and syndicate up to 50% of the transaction to our blue chip LP base was key to win this deal," the document noted.
Secondaries returned 12 percent over the past year, but that was only enough to make it Florida State Board of Administration's fifth-best-performing private equity asset class, according to the pension fund's September meeting documents.
The asset class finished behind non-US buyouts, which grew 12.1 percent; US growth equity, which grew 17.2 percent; distressed/turnaround, which grew 20.5 percent; and US buyouts, which topped the list with 23 percent growth over the last year.
US venture capital and non-US growth equity came in below secondaries, with returns of 7.6 percent and 10.5 percent over the period, respectively.
Despite this, since inception the asset class is the pension's second-best performer, returning 15.8 percent compared with distressed/turnaround's 20.5 percent. Secondaries have outstripped the MSCI public market benchmark by 800 basis points over the period, achieving a distributed-to-paid-in ratio of 1x and a total-value-to-paid-in of 1.5x.
Florida SBA’s secondaries portfolio is split 57 percent to 43 percent between Lexington Partners and Ardian, Secondaries Investor reported in June.
Florida SBA's private equity portfolio has $9.8 billion in net asset value and additional $6.3 billion in unfunded commitments. It has 162 active funds managed by 64 GPs. Secondary investments make up around 5 percent of the portfolio, according to the meeting documents.
According to senior investment officer John Bradley, Florida SBA is increasing its exposure to the small end of the private equity market and sector specialists, while reducing its exposure to the largest buyout funds. It has also been a willing seller.
"We've also been very active in the secondary market and strategic in using that market to help facilitate some of these portfolio transitions," he added, "as well as realise [sic] some liquidity at what we think are very attractive valuations."
UPS Group Trust has not traditionally been shy in buying or selling on the secondaries market, according to the man in charge of its private equity allocation.
The pension plan of the world’s biggest delivery business, which has a $3 billion private equity portfolio, has not been attracted to the secondaries market in recent times, according to portfolio manager Brady Hyde.
“We’ve sold a couple of positions, we’ve evaluated a lot of different portfolios, but we felt that the benefit to us from a seller’s perspective hasn’t really been there,” Hyde said. “We’ve done a transaction or two on the sale side.”
The last time the pension sold any positions was in 2015, according to Hyde. Since then the team has seen more benefit in holding well-performing investments rather than selling at a discount.
On the buyside, competition has heightened – exacerbated by traditional secondaries buyers increasingly using leverage – which has been driving up pricing.
Until 2012 UPS’s roughly three-decade old private equity programme was staff-constrained and focused mainly on committing to funds of funds, secondaries funds and large buyout funds. As part of a larger post-global financial crisis transformation across the entire portfolio, the UPS private equity portfolio has followed a route familiar to many private pension plans, shifting from a passive approach to more active management.
It now counts three separate accounts in its private equity portfolio and has also made a number of co-investments and one direct lead investment.
UPS remains poised to access the secondaries market when more attractive conditions emerge, Hyde noted.
“We still view secondaries as strategic in our portfolio in terms of mitigating the J-curve and getting some unique exposure in the portfolio,” he said.
The members of one of the US’s biggest pension schemes are used to coming to other people’s rescue, but in recent months the police and fire officers of Dallas have been the ones in need of aid.
The US public sector is home to some 6,000 state and local pension funds holding about $3.8 trillion in assets between them. About 95 percent of that is managed by the top 200 pensions, including the Dallas Police and Fire Pension System, which last year tottered on the brink of collapse under the weight of seemingly unwise investments in real estate and other alternatives.
Secondaries sales were part of Dallas's attempts to steadily whittle down its portfolio of alternatives. To reduce its exposure to private investments, the pension fund has been selling assets on the secondaries market with the help of investment bank Evercore. In December the pension fund board approved the sale of 26 fund investments in real estate, private equity and private debt. Those sales brought in $133 million in 2016 and another $113 million in 2017.
Bad investments, and the existence of an easy route for retirees to cash out their pension benefits with lump sum withdrawals, drained more than $1.5 billion from the fund’s net asset value. The pension, which did not reply for comment for this article, saw its funded liability rate plummet from 70 percent to as low as 35 percent by early this year, leaving it facing the prospect of running out of money in about a decade.
State and local governments joined police and fire employees recently to hammer out a rescue requiring sacrifice on all sides. But the depth of the problems raised questions about management and solvency at other pension funds and on the use of alternatives to boost returns, including real estate, private equity and private debt.
For alternative asset managers, which may regard pension funds – with their deep pockets and long-term financial horizons – as dream clients, the Dallas fiasco is a wakeup call. That is especially the case because when a pension fund fails the finger-pointing often extends beyond the pension fund’s managers to outside financial advisors.
“Smart asset managers will not get in bed with bad pension funds,” says Leo Kolivakis, a Canadian-based pension fund analyst and blogger who has worked as an analyst at Canadian pension funds. “There is reputational risk.”
But turning down a pension fund as a client is not a decision most asset managers would easily make, particularly smaller managers trying to grow their funds. Established and successful managers may have the luxury of being more selective. “Top asset managers can pick and choose their clients,” Kolivakis says. “They will be leery of dealing with rinky-dink funds that can go bust.”
Charles Sizemore, principal of investment advisor Sizemore Capital Management in Dallas, has monitored the city’s police and fire service pension situation. He agrees that poor pension fund governance can wind up damaging the image of not just the pension but also of a reputable advisor or alternative manager, particularly when an advisor’s recommendations are ignored in favour of riskier investments that subsequently turn sour.
“If they don’t follow your advice, you have to make sure the finger isn’t pointed at you,” Sizemore says. “They can blame you for it [if things turn out badly]. A lot of people would take one look at the Dallas fund and say, ‘No thanks.’”
The reputational risk is not just from good advice ignored but also from advice that plays out badly. Public pension funds are just that: public. Mistakes tend to be aired in public and financial advisors need to be aware of that.
“Pension funds are large pools of money that are meant to protect public workers,” says Josh McGee, vice-president of public accountability at the Laura and John Arnold Foundation, which does research and advocacy on public pension financing. “There is a risk that when they don’t provide adequate advice, there is going to be public scrutiny. People who are investment advisors or run private funds should take that seriously.”
What happened in Dallas is an example of just how costly poor investment and pension management decisions can be. “There are a lot of underfunded pension funds, but most have more sensible assets in their portfolios,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “Those in the Dallas portfolio were really quite unusual.”
In an article Munnell wrote for Market-Watch, she described the Dallas portfolio as “crazy”. The pension reached a point where 70 percent of its assets were in alternatives, she wrote, compared with 22 percent for a sample of 160 state and local plans examined by CRR.
But the key issue was the diverse and exotic nature of these alternative assets. The Dallas fund owned luxury homes in Hawaii, a California resort and vineyard, thousands of acres of undeveloped land in Idaho, timberland in Uruguay, and an interest in the production company behind the television series, American Idol.
The fund’s managers ventured into riskier real estate and other alternative investments in the hunt for yield capable of supporting an aggressive return target of 8.5 percent that was needed to support growing liabilities from pensioners. After the tech bubble popped in the 1990s, Dallas pension fund managers pivoted from bonds and equities to riskier bets in the hope of securing better returns.
‘BREAKDOWN IN GOVERNANCE’
Outside observers point to the fund’s unsophisticated board and management as a key factor in the creation of the hodge-podge investment portfolio. Its board was comprised of city council members and current and retired police and fire employees, with no seasoned financial professionals.
“Clearly there was a breakdown in governance,” McGee says. Further complicating matters was the fund’s generous withdrawal policy. Called the Deferred Retirement Option Program, it was created in the 1990s and resulted in a run on the fund in 2016, as worried pensioners withdrew hundreds of millions. By then, the fund was projected to run out of money in about a decade.
Richard Tettamant, the fund’s executive director who oversaw the move into alternatives, resigned in 2014 and was replaced by Kelly Gottschalk, who has overseen the reorganisation. Mike Rawlings, the Dallas mayor, recently named six business people to the pension fund board. While it will take time for the fund to wean itself off its collection of assets that are difficult to sell, the reforms are already credited with putting the fund on a firmer footing and lowering the level of the unfunded liability.
“I find it encouraging that when all hell breaks loose, people do put together a serious reform package,” Munnell says. The underlying issue that Dallas sought to address – underfunded liabilities – is a significant and growing problem for public pension funds. McGee points out that public pension promises have steadily increased, to the point that they now account for about a third of US gross domestic product – triple what they were back in 1990.
How public pensions will meet those obligations remains unclear. And while most of the focus is on larger public pension funds, the thousands of smaller ones may also be vulnerable, according to Kolivakis, partly because there is little attention paid to them.
If a big police and fire pension fund in a city like Dallas can get into trouble, what’s to protect the thousands of small pension funds from running into their own investment boondoggles?
One element researchers have been watching is the move by public pensions into alternatives, because they are less liquid and more difficult to deal with when problems arise. CRR looked at a sample of US pensions and found their allotments to alternatives increased from 9 percent of holdings in 2005 to 24 percent in 2015. At the same time, traditional equity and fixed income investments declined.
Those statistics hide the wide differences in approaches among funds. CRR found that in 2005, half the plans had less than 10 percent in alternatives and none had more than 30 percent. By 2015, only one in 10 plans held less than 10 percent in alternatives, and some had more than 50 percent.
As Sizemore points out, a large commitment to alternatives is not in any way itself a reason for concern. Indeed, the opposite may be true in many cases. Ninety-three percent of investors said their alternative asset allocations had either met or exceeded their expectations over the prior 12 months, according to a study by BNY Mellon last
year. Almost two-thirds said the alternatives allocation had delivered at least 12 percent.
What matters is how the investments are managed and directed, and how well thought out the investment strategy is – an unusually large allocation to real estate can work out fine, provided it is the right kind of real estate. Ultimately, Sizemore says, the problem in Dallas wasn’t the use of real estate and alternatives, but the type and quality of those investments.
“There is nothing wrong with good, stable cashflow real estate,” Sizemore says. “That is the kind of stuff that Dallas should have been investing in. That is an appropriate investment for a public pension fund. But raw land out west? That is not appropriate.”
Despite selling a number of fund interests on the secondaries market, the pension continues to be overweight private equity in its portfolio, with exposure to the asset class representing $227.9 million, or 10.8 percent as of 31 July. This is down from 14.8 percent in March, but still above its 5 percent target allocation to private equity.
The private equity portfolio has underperformed, posting a 2.06 percent loss for the first quarter ended 31 March, versus a return of 6.5 percent from its benchmark. For the year ended 31 March, the portfolio returned 1 percent versus the 21.5 percent from its benchmark.
As of 31 July, the pension plan still had unfunded capital commitments to private equity funds including Lone Star Growth Capital, Lone Star Opportunities Fund V and and a 2016-vintage Industry Ventures fund.
Stafford Capital Partners has hit third close on its eighth timberland fund, according to a statement from the firm.
Fund of funds Stafford International Timberland VIII held the close in August on $329 million, the statement says. It is targeting $500 million, according to data from Private Equity International, to acquire limited partnerships stakes, invest in separately managed accounts and co-investments, and commit to funds in the strategy.
Fund VIII has already made six investments worth $64 million.
In May Swiss pension fund ASGA Pensionskasse made a $100 million commitment spread between Timberland VIII and a separately managed account focusing on agriculture, the first such account created by Stafford for a limited partner.
Stafford also announced that it has completed the deployment of its seventh timberland fund of funds.
The London-headquartered firm invested the $484 million, 2015-vintage Stafford International Timberland VII within three years, according to the statement. The final transaction was the purchase of a $15 million stake in a diversified timber portfolio in the south of the US.
The firm is also raising Stafford Infrastructure Secondary Fund II, the first dedicated secondaries fund focusing on the asset class since the merger of Stafford Timberland and Australia's Quay Partners in 2014. It has received total commitments of €200 million so far from investors including the European Investment Fund, according to the statement.
In March Stafford struck its second deal from the fund, acquiring a stake in the Deutsche Bank-managed 2007-vintage RREEF Pan-European Infrastructure Fund. The stake in the €2 billion fund was acquired from Paris-headquartered SCOR Investment Partners.
Stafford Capital Partners has more than $4.9 billion in assets under management across agriculture, credit, infrastructure, private equity, sustainable capital, timberland and venture capital.