Many were expecting 2017 to be the year when GP-led secondaries processes truly arrived, when big-name deals would cement their role as a portfolio balancing tool, not just a cry of distress. These observers were largely correct, as one big deal after another came to the market.
In June it emerged that BC Partners, one of Europe's biggest private equity houses, was considering using a stapled deal to help boost fundraising for its €6.7 billion 10th fund.
The process, which closed in September, involved secondaries firm Lexington Partners buying around $700 million worth of stakes from 22 limited partners in BC European Capital IX, a 2011-vintage, €6.7 billion vehicle, at the same time as committing around $300 million to Fund X.
“Some of their peers have been racing to big numbers,” an LP in BC IX told sister publication Secondaries Investor in June. “They have now got to a decent initial number and this is just to top them up.”
In July Secondaries Investor revealed that Warburg Pincus was exploring a process on one of its funds. That transaction, which closed in October, involved the buyout firm selling a $1.2 billion strip of Asian investments from its 2012-vintage, $11.2 billion Fund XI, helping the firm reduce its exposure to the region. Lexington and Goldman Sachs Asset Management backed the deal.
In September two large Scandinavian private equity firms also got in on the action. In a self-run process, EQT gave investors in its sixth and seventh flagship buyout funds the option to sell their stakes to Swiss-based Partners Group, which in turn made a stapled commitment to the $800 million-target EQT Mid-Market Asia III. LPs who decided to part with their stakes received a 19.5 percent net internal rate of return and a 1.8x net money multiple.
A process on Nordic Capital's Fund VII, a €4.3 billion buyout vehicle, had its first bidding round in the last week of November. The deal would involve moving the remaining 10 assets in the 2008-vintage fund, which has a net asset value of around €2 billion, into a multi-year continuation vehicle which would have a five-year term. Advisory firm Campbell Lutyens is running the deal.
Not a done deal
The traffic has not all been one-way. In October Apax Partners decided against carrying out a process on its €11.2 billion, 2007-vintage Apax Europe VII fund as it became clear from conversations with the LP advisory committee that their was insufficient investor support. Investors had been given the option to cash out or roll over their commitments into a continuation fund with a five-year life.
Market participants have questioned whether it is fair to propose a process with no "do-nothing" option, which does not allow LPs to continue with what they signed up to at the start of the investment period, or whether it is fair for smaller LPs to deal with the legal- and tax-related costs of rolling their holdings into a new vehicle, regardless of whether the ultimate returns are higher.
Others have expressed the view that GPs will have to become better at communicating the aims of such processes to their LPs, to give them the confidence that the deal is worth the effort and that all interests are aligned. Conversely, one buyside source told Private Equity International that he expects GPs to become more aggressive in their use of GP-led processes in 2018, as they make decisions that they believe are in their "investors' best interests", whether they like them or not.
As secondaries become more mainstream, further debate regarding how best to run such processes is likely to continue into the new year.
Landmark Partners has exceeded the $2 billion target of its latest real estate fund around 14 months after launching the vehicle.
According to filings with the US Securities and Exchange Commission, the main onshore vehicle of Landmark Real Estate Partners VIII has raised $2.4 billion.
A total of $876.3 million was raised through a Cayman Islands-domiciled offshore fund, according to another filing, and there are two additional side vehicles registered with the SEC.
It is unclear how much Simsbury, Connecticut-based Landmark has raised in total for the programme and the firm did not return requests for comment.
The fundraise exceeds the previous largest real estate secondaries fund, Partners Group Real Estate Secondary 2013, which raised $1.95 billion.
M-Vision Private Equity Advisors, Seoul-headquartered KB Investment and Securities, Santiago-based LarrainVial Investment and WAI Alternative Investments of Zurich were placement agents on the fundraise for Fund VIII.
It has received commitments from 112 investors, according to the filings.
Investors include Connecticut Retirement Plans and Trust Funds with a $65 million commitment, Minnesota State Board of Investment with $150 million and New York State Teachers' Retirement System with $150 million, according to data from sister publication PERE.
Fund VIII will invest largely in non-control, minority limited partner positions in commingled funds, Secondaries Investor reported in June. About 30 percent of the fund’s capital is likely to be invested outside of the US, with transaction sizes ranging between $1 million to $1 billion.
Its loan-to-value ratio is capped at 70 percent and the three predecessor vehicles have not exceeded 60 percent leverage. Predecessor Fund VII’s average deal size was $46 million, according to the same Secondaries Investor report.
Landmark is targeting a 14-16 percent net internal rate of return for Fund VIII. It has a 1 percent management fee, 8 percent preferred return and 12 percent carried interest.
According to a half-year report from secondaries advisor Greenhill Cogent, $4 billion-worth of real estate secondaries traded in the first six months of this, equivalent to the volume for all of 2016.
On average, real estate stakes traded at 92 percent of net asset value in the first half of 2017, up from 88 percent in 2016, according to the report.
Real assets secondaries have come to the fore in recent weeks. There have been large infrastructure deals, such as Ardian moving assets from its 2006-vintage AXA Infrastructure Fund II into a new vehicle backed by APG and AXA, and Pantheon's acquisition of five European renewable and concession-based assets in a GP-led deal with European manager Marguerite.
Real estate deals may not have grabbed the headlines in the same way – fundraising figures for secondaries in the asset class show less than $500 million in final closes for the strategy as of November, according to sister publication PERE’s data. But that looks set to change, as filings show Landmark Partners has raised $2.4 billion for its latest real estate fund and $876 million through an offshore fund.
It is not the only significant dedicated pool of capital ready to be deployed into real estate secondaries – Partners Group is plotting a final close on €2 billion for its latest fund dedicated to the strategy – and dealflow looks solid too.
According to data from Landmark, $4.9 billion of real estate secondaries was under contract until 20 September, and based on the current pipeline, the total investment volume for this year is expected to exceed the $5 billion achieved last year, potentially even exceeding $6 billion.
One reason for this rise in transactions is that a secondaries trade is evolving. Beyond traditional buying of fund interests, fund recapitalisations in particular are becoming a burgeoning source of dealflow for today's secondaries dollars.
This non-traditional secondaries trade has grown rapidly due to changing sell-side motivations brought about by the late stage in the primary investing market. The transactions are now accepted as an efficient liquidity option. There had been a stigma attached to deals like these, partly because of their nascence, but also because the vehicles in question were associated with the global financial crisis. Fund managers would find themselves with assets in a vehicle at the tail-end of its life with no other way of moving forward without a recapitalisation. With crisis-level performances, investors were less tolerant of managers repurposing straggling assets in a new vehicle.
That stigma has largely been removed. Managers are even considering recapitalisations as a way to grow their businesses, particularly in value-add or opportunistic markets with aspirations to extend offerings to core real estate. Crucially, investors keen to keep exposure to core assets that would otherwise be challenging to acquire, are more accommodating.
And so, transitioning a tail-end portfolio, rather than liquidating it, is now a more agreeable possibility for managers and investors. Of course, such transitional work requires careful execution to protect against conflicts of interest. But, as PERE noted in its special report on private real estate secondaries for December, some advisory practices are finding that aspect provides another viable business line for them.
Manager-led activity is increasing, with fund and portfolio restructurings totalling around $1.6 billion so far this year, according to Landmark. With a primary market that offers participants less space for manoeuvre, it seems likely that number will be meaningfully bigger next year.
– Thomas Duffell and Adam Le contributed to this report.
Italian infrastructure fund manager F2i has sealed a €3.1 billion first close on its third fund, seeding the new vehicle with assets from its maiden fund.
The group secured over €1.7 billion from the 11 main investors in its first vehicle, comprised of two Italian pension funds, five local banking foundations, Ardian, Intesa Sanpaolo and Cassa Depositi e Prestiti.
A further €1.4 billion has been committed by international investors including pension funds, sovereign wealth funds, asset managers and insurance companies, ahead of an expected close early next year on €3.3 billion. Canadian pension scheme PSP Investments and Singapore’s sovereign wealth fund are understood to have each invested €450 million, although F2i declined to comment.
The 12-year fund has merged the assets of F2i’s first fund, which closed on €1.8 billion in 2009 following its launch in 2007. These include holdings in gas distribution company 2i Rete Gas, a number of Italian airports, renewables group EF Solare Italia, water company Iren Acqua and toll road operator Infracis.
Both the first F2i fund and the second €1.2 billion vehicle – which is 75 percent invested – have so far only invested in Italy. Chief executive Renato Ravanelli indicated this could change in the latest offering.
“The goal was to raise new capital to continue the development, both in Italy and abroad, of the sizeable infrastructural holdings put together to date by F2i’s first fund, which had drawn on all of its commitments,” he said. “The response of investors has been extremely positive.”
The first fund has delivered a gross internal rate of return above 12 percent, F2i confirmed. The third fund will target a similar figure.
Infrastructure GPs with first-time vehicles coming to the end of their life cycles have increasingly been looking at exiting them wholesale, as opposed to doing piecemeal asset sales. Structures can involve rolling over existing assets into brand new vehicles – with a lower risk-return profile and a longer duration – which they then open up to new LPs through stake sales.
Various past examples include Dutch fund manager DIF's sale in November 2014 of its maiden infrastructure fund DIF PPP to Aberdeen Asset Management.
F2i’s second fund has this year focused on consolidating the fragmented Italian telecoms market, acquiring Infracom, MC-link and KPNQwest Italia alongside the Marguerite Fund. It has also boosted its presence in the Italian wind and biomass industries.
Standard Life Aberdeen is planning to launch a venture capital secondaries fund in the second half of next year, Secondaries Investor has learned.
A source familiar with the matter said the decision was motivated by the bright prospects of the European venture capital market and the fact that so many VC funds are coming to the end of their lives with significant remaining net asset value.
It is understood the target of the fund has not yet been decided.
According to data from Pitchbook, VC funds of 2000-2007 vintage hold $67 billion in net asset value globally. European VC funds account for $9.6 billion of that total.
Standard Life and Aberdeen Asset Management completed their merger in August, creating an entity with £583 billion ($781 billion;€663 billion) in assets under management, £28 billion of which is allocated to private equity.
Aberdeen is raising Aberdeen US Private Equity VII which is targeting $300 million and set to close in the first quarter of next year, Secondaries Investor understands. The fund has a 15-20 percent allocation to secondaries and direct co-investments, according to an Aberdeen document on the fund seen by Secondaries Investor.
According to the half-year report by secondaries advisor Greenhill Cogent, venture capital secondaries were achieving an average price of 82 percent of NAV in the first six months of 2017. This is up from 78 percent of NAV in 2016.
Venture capital funds accounted for 18 percent of stakes that changed hands in during the first half of 2017, real estate 27 percent for and buyout 31 percent.
Standard Life Aberdeen declined to comment.
Altamar Capital Partners has transferred a portion of its holdings in Cinven's fourth flagship fund to Ardian, according to UK public filings.
The Madrid-headquartered firm divested around 45 percent of each of two stakes it held in the Fourth Cinven Fund, the first from Altamar Buyout Global II and the second from Altamar Buyout Global III.
The stakes were acquired by ASF Brighton, a vehicle registered by Ardian in July.
Altamar Buyout Global II is a 2007-vintage, €186.6 million fund of funds, according to PEI data. Its successor, which launched the same year, raised €233.4 million.
Investors in Fund III include Spanish bank Caja de Ahorros Municipal de Burgos, PEI data show.
The 2006-vintage Fourth Cinven fund raised €6.6 billion to invest in western European buyouts, exceeding its target by €1.6 billion. Investors in the fund include Adams Street Partners, Canada Pension Plan Investment Board and New York State Teachers' Retirement System.
According to Cinven's website, remaining assets in the fund include Just Group, a UK-headquartered financial advisor, and JOST, a German truck component manufacturer.
Altamar Capital Partners uses primary, secondaries, fund of funds and co-investment strategies. It has €3.5 billion in assets under management, according to PEI data.
Cinven and Ardian declined to comment. Altamar did not return a request for comment.
One quarter of limited partners are not involved in the secondaries market going into next year, according to a survey by placement agent Probitas Partners.
In the firm's Private Equity Institutional Investor Trends for 2018, 26 percent of respondents say they "are not active in secondaries in any manner", up from 17 percent in last year's survey.
Probitas managing director Kelly DePonte believes that although complex deals can offer attractive returns, their complexity as well as the scrutiny they have drawn from the US Securities and Exchange Commission have suppressed a notable increase in deal volume. He also believes that lumpy fundraising this year created a somewhat misleading picture of the market.
"Fundraising for secondaries is up again this year but that has really been driven by three well-regarded, long-lived managers that a number of investors see as core holdings," DePonte told Secondaries Investor. "I’m not sure interest this year was truly widespread, and on the basis of this survey it won’t be widespread in 2018."
The number of LPs who actively invest in secondaries funds fell to 44 percent from 48 percent the year before. Activity for LPs directly acquiring stakes in funds weakened, as well, to 37 percent from 43 percent.
Direct secondaries had a slight increase in popularity, with 19 percent of LPs expressing an interest in acquiring direct positions in companies on the secondaries market, compared with 12 percent last year.
The survey attracted 98 institutional investors, with fund of funds managers (28 percent), insurance companies (15 percent), advisors (15 percent) and public pensions (14 percent) making up the bulk of respondents.
North America accounted for 53 percent of responses, the UK 22 percent and Asia 16 percent.
Patrick Lynch, head of funds and partnerships at Canadian pension fund manager Caisse de dépôt et placement du Québec, has joined private equity firm Fiera Comox as a partner.
[caption id="attachment_22255" align="alignleft" width="180"] Patrick Lynch[/caption]
According to a statement from the firm, Lynch will focus on all aspects of private equity, including direct investments and secondaries.
The firm aims to gives investors "access to a strategy based on the principles of the Canadian pension plan and sovereign wealth fund approach to private equity investment", the statement noted. According to partner and chief executive Antoine Bisson-McLernon, this is defined as an approach based on a close partnership model.
During his two years at CDPQ, Lynch was responsible for managing the private equity portfolio, executing secondaries sales and building investor relationships, according to his LinkedIn profile.
Prior to joining the institutional investor he spent seven years as head of funds and global investment partnerships at Abu Dhabi-based Mubadala Investment Company.
Montreal-headquartered Fiera Comox was formed in 2016 as a joint venture between Fiera Capital, an asset manager with C$125 billion ($97.3 billion; €82.7 billion) under management, and Comox Equity Partners, which was formed by three former executives from pension fund manager the Public Sector Pension Investment Board.
Fiera Comox was initially set up to invest in agriculture and has now added private equity to its remit with Lynch's appointment.
US real estate investment manager NorthStar entered the secondaries scene in 2013 by landing portfolios with TIAA-CREF and the New Jersey Division of Investment in deals totaling nearly $2 billion.
Its merger with Colony Capital to form Colony NorthStar last year has done nothing to abate its appetite in the space. Managing director and co-head of investments Robert Gatenio and senior vice-president Bill Bowman tell sister publication PERE that Colony’s experience as a primary investor has given the secondaries platform an added advantage in the marketplace.
PERE: Why did Colony NorthStar enter the real estate secondaries business?
Robert Gatenio: NorthStar executed two large transactions in 2012-13, at which time we thought the risk-return profile made sense due to valuation levels and the fact there were a lot more sellers than buyers in the market. It was a big bet, but we have done more than 15 deals and built a track record in the sector since then.
Bill Bowman: NorthStar’s balance sheet made those investments for the same reasons that any investor would. Buying into a secondaries pool provides diversity of geography, property type, investment style and manager. A secondaries investment generally occurs after fund investments have been made; therefore, the money tends to come back faster, so you can achieve attractive returns with less risk.
The real estate secondaries market has been growing over the last 10 years or so but there are still a limited number of players. Firms like Colony NorthStar, a large publicly-traded REIT with an embedded investment management business, can invest on behalf of its own balance sheet as a public REIT as well as managing vehicles for institutional and individual investors.
PERE: What are the benefits of being a primary real estate fund manager and investor for operating a successful secondaries platform?
BB: Institutional investors have several different reasons why they might sell secondary positions: they might be looking for liquidity, to shed non-core managers or adjust their portfolio allocations. The use of secondaries has become an accepted portfolio management tool. The bulk of the secondary transactions that have been done are pre-financial crisis funds that are getting near the end of their life.
In the future, we will see more fund restructurings where existing investors combine with new outside capital to buy out other investors, buy assets out of the fund, or set up a structure to hold assets in the fund for longer. Those transactions will be more asset-focused than some previous secondaries deals, so having experience as a direct real estate investor should be valuable.
RG: The leading contenders in the market are secondaries specialists, and most have real estate as a sleeve within the bigger secondaries bucket. As a commercial real estate-focused firm, that is our only focus when it comes to secondaries. Seeing commercial real estate through the lens of a lender, a borrower, an equity owner and an operator allows you to understand and underwrite the assets better.
A large primary investor like Colony NorthStar looking at a specific asset in a particular market may have made a loan in that market or own an asset in it already, so it is able to leverage the associated infrastructure and knowledge base. Such an investor could bid on a property that is competing with that asset, so you will have an insight on how the asset is viewed in the market from your investment and management teams, outside brokers and networks.
For example, we were just looking at a pool with an investment in an office building in Ohio. We happened to own a subordinate debt on a property competing with it within one mile of that asset. We were able to call our asset manager up and get his view of the market. He put us in touch with two brokers and we got a sense of what the rents and rent-free periods are in that market. It gave us a boots-on-the-ground direct insight into how the property performs.
BB: Also, if you invest in commercial mortgage-backed securities, then in CMBS there is a wealth of information that you can get about property transactions, cashflows and rental rates. If you operate internationally, you have the knowledge and resources to look at a broader range of funds, whereas perhaps bidders with a domestic focus may only look at assets in one particular territory, precluding them from providing a total solution for the seller.
PERE: Thematically, what is the major difference between primary and secondaries investing?
BB: One of the key differences between primary and secondaries investing is that when you are an institutional investor investing in a primary fund you are making a bet on that manager’s ability to execute within a market through a specific strategy on a go-forward basis.
It is a blind pool. However, when you buy into a secondaries transaction you are almost always past the underlying fund’s investment period, so you are underwriting identified assets. You are looking at the value of the assets today and what you think the value of the assets will be upon realisation. The manager’s ability to execute the strategy is less important than on the primary side, except for the assets that have not yet reached stabilisation.
Because you are investing in identified assets, the ability to underwrite those assets becomes more important. You are underwriting a cashflow stream based on less than perfect information, and the ability to do that accurately and well is the most important skill in these transactions. When you look at a secondaries investment, the information you are given is generally the quarterly and annual reports of the manager, and the range of detail and transparency you get across managers varies greatly.
Some of that is a function of style or scale and the types of assets they may have. These limited partnership positions are illiquid, and it takes a fair amount of work to determine value in order to trade them. Having a greater depth of information is extremely helpful in wading through the range of detail you get in those reports.
This article is sponsored by Colony NorthStar. It appears in the December issue of PERE magazine.
Ardian has agreed the sale of its second infrastructure fund’s portfolio following a deal with APG and AXA.
The pair have bought all eight of the assets held by the €1.1 billion AXA Infrastructure Fund II, a vehicle launched in 2006 before Ardian had spun out of AXA. Both APG and AXA were existing investors in the fund.
The acquired assets comprise stakes in Italian gas distribution company 2i Rete Gas, French high-speed railway Lisea, Spanish toll road Trados M-45, French rail GSM communications’ network Synerail, French renewable energy group Kallista Energy, Italian renewables company 3 New & Partners, French toll road A88 and Italian hospital HISI Legnano.
Ardian will retain either an asset management or advisory role at each of the companies and projects. It began the process of divesting the fund last year, a move which involved several bidding rounds.
“A transaction of this magnitude is unique,” Mathias Burghardt, head of infrastructure at Ardian, told sister publication Infrastructure Investor. “We’re talking over €1 billion in equity but over €10 billion in asset value. We thought it was easier to maximise price by selling the full portfolio. This portfolio has been [delivering] over 10 percent yield per annum and there was value to keep it all together.”
A spokesman for Ardian declined to provide further details on the financial relationship it now has with the assets.
The fund had originally been targeting an average yield of between 5 percent and 7 percent and a 12 percent to 15 percent gross IRR, documents from AXA disclose.
The deal is not the first time APG has opted to purchase an entire portfolio. The Dutch pension fund manager bought all 48 assets in the DIF Infrastructure II fund in July, following its acquisition of DIF PPP in 2014. APG also backed 3i’s buyout of the EISER Global Infrastructure Fund at the end of last year.
“We’ve seen some previous asset-by-asset deals but I think this is the first time a portfolio of this magnitude was sold through a competitive process,” Burghardt added. “I think it’s quite an interesting transaction in the evolution of infrastructure.”
The deal is expected to close in the first few months of next year.
The chairman of Florida State Board of Administration's investment advisory council has questioned the role of secondaries in two of the pension's separately managed accounts.
Peter Collins acknowledged the benefits of secondaries in mitigating the J-curve and improving internal rates of return, but questioned whether the asset class fulfilled the job-creation remit of Florida Growth Funds I and II – vehicles used to encourage growth in Florida-based enterprises – according to a transcript of the council's 25 September meeting published last week.
"We have to remember that this idea started out as a way of promoting businesses in Florida and growing businesses in Florida," he said. "Personally, I just wonder how much impact that has if we're doing secondaries... If you brought me two deals and one was a direct investment and one was a secondary and you'd ask me if they were similar, I would take the direct investment."
Florida Growth Fund I was formed in 2009 with $500 million of capital with the aim of generating attractive returns by investing in growth and technology companies in Florida. Fund II was launched in late 2014 with a first tranche of $250 million in capital, according to the transcript. The funds are managed by Hamilton Lane.
Ash Williams, an executive director at SBA, emphasised that it had turned down investments with great return potential due to the likelihood of those companies suffering job losses. At the same time, strong returns are the ultimate consideration.
"While the employment is great and we're delighted to have it, particularly at double the
average wage in Florida, that's a nice but, without being negative, not necessary component," he sad. "We're in this as fiduciaries to earn an attractive risk-adjusted
Fund I and Fund II are performing at a 12 percent net internal rate of return, according to the meeting transcript.
According to Nayef Perry from Hamilton Lane, Fund II was "J-curve positive" within two quarters, partly because it sought to carry out a secondaries transaction early on, prompting the statement by Collins.
The pension plan is committed to Ardian's and Lexington Partners' secondaries funds, and invested $150 million and $500 million to those managers' latest respective flagship vehicles, according to PEI data.
Since Michael Granoff founded secondaries firm Pomona Capital nearly a quarter of a century ago, the market has grown significantly. With some funds expanding in size, Pomona has strategically and deliberately kept its fund sizes modest, with the most recent closed vehicle, Pomona Capital VIII, being $1.75 billion.
Typically buying only 1 to 3 percent of the dealflow it sees each year, Pomona believes in the importance of being disciplined and selective. Pomona tends to focus on niche, mid-size transactions where it can take advantage of inefficiencies, capitalise on its edge and steer away from buying a slice of the generic secondaries market.
In a recent interview, Granoff explains what makes Pomona different, his views on GP-led transactions, the state of the secondaries market and opportunities from retail investors.
[caption id="attachment_472248" align="alignleft" width="200"] Michael Granoff[/caption]
What differentiates Pomona in this market?
In today’s market there is no shortage of dealflow. Increased volume brings with it increased variability in transaction size, asset type and quality, and liquidity profile. What differentiates Pomona is our ability to seek opportunities where we believe we have an edge and not compromise on asset quality or price.
Our modest-sized funds provide us with the ability to be deliberate in our investment decisions without the pressure to deploy capital and sacrifice our strategy and risk/return objectives. Typically, our sweet spots are transactions $100 million in size, but our flexibility keeps us focused on selectively buying quality assets at good prices. If you look at our last secondaries fund, Pomona Capital VIII, the largest transaction was over $400 million and the smallest was about $10 million. Being able to be that nimble is a real benefit to us. If we could only buy tiny little pieces of things, I think we’d be really limited in what we would see. If we could only buy the largest transactions, we would end up in the more efficient side of the market and have to compromise on quality or price.
What type of transactions do you pursue?
Pomona focuses on uncovering opportunities where we believe we have or can create a competitive advantage. We seek transactions where we have the ability to capitalise on an informational advantage through existing relationships and in-depth knowledge of particular assets and/or funds or leverage our status as approved buyer on a general partner’s restrictive list.
We invest mostly in LP stakes and take a targeted approach focused on acquiring high-quality and mature assets that have identifiable near-term liquidity and downside protection. We maintain a disciplined pricing approach in our efforts to provide a margin of safety on the downside and to enhance returns on the upside. We actively seek ways to enhance liquidity for our investors while also achieving a lower risk profile by targeting mature assets that are typically five-to-seven years old and funds that are 70-90 percent called. Often assets in these portfolios have substantially de-levered, are demonstrating positive operational performance and are preparing for liquidity events.
Do you invest in GP-led secondaries transactions?
I haven’t seen too many good funds that needed to be restructured, so the barrier for our participation is high. We have been sellers in many more cases than we have been buyers. Pricing is generally high and close to NAV. There is usually not much growth left in the assets. If you told me I could take my money off the table today and lock-in returns for our limited partners, or wait years for the same amount of money, I would rather take the money now, especially in the current environment.
How important is primary investing to secondaries?
Our relationships with GPs are important. Primary investing is one element of the multidimensional relationship we seek with GPs. We’ve built a lot of critical mass in the primary asset class over the years. Today, we manage over $3 billion in primary commitments and deploy approximately $250 million a year on the primary side. We do some co-investing as well. Over the past 23 years, we have developed relationships with over 600 GPs from around the world. As a primary investor, Pomona is able to leverage those relationships and create an informational edge that we can apply to our secondaries investing platform. This informational edge is invaluable in today’s market, where GPs tend to avoid giving insight into underlying portfolios and are becoming even more restrictive in consenting transfers to many secondaries players. In our last fund, nearly half of the transactions were in one way or another directed to us by a GP. Having that critical mass really helps.
Where do you see the secondaries market heading in the next 12 months?
Dealflow is quite robust. It may be that we are entering a period where we are going to see more dealflow because of the amount of capital that went into private equity after the financial crisis. Pricing is tight, but because we don’t need to deploy too much capital, we believe we can pick our spots and buy better than market quality assets at lower than market prices. The most probable outcome at the beginning of 2018 is a continuation of what we’ve seen in the second half of 2017.
That’s subject to some macro considerations about what other markets and the rest of the world look like, and that’s hard to predict. Europe is doing better than people thought. The US is doing fine. People were concerned about Asia and China and they seem to be doing okay. But, there are also a lot of anxieties and things percolating that could interrupt the growth. This could include what our Congress is able to do in terms of legislation, what happens to tax and healthcare reform, geopolitical concerns, and the many other unexpected events that we can’t predict.
In the next four years, it’s more likely than not that we will enter a period of distress and disruption. In this case that will create more opportunities for us because there will be more distressed sellers. However, we also need to be very careful. Disruption will create opportunities, but we will need to have a lot of conviction before jumping into it. It will take a little bit of time for us to make sure we are comfortable, but we believe our nimbleness and selective approach to secondaries investing will allow us to take advantage of opportunities as they arise.
How can a secondaries firm buy quality assets at an attractive discount?
The market is not monolithic. It’s a big market. Sellers sell for many reasons. We’re buying only 1 to 3 percent of the dealflow we see. We know the funds, we know the assets, we know the GP and we might even know things that others may not about what’s happening to the underlying companies. As a result of our targeted approach, we are able to consistently buy at a price below the market averages. For instance, Pomona Capital VIII, which we invested between 2012 and 2016, has now returned over 90 percent of drawn capital and has experienced many realisation events. The average discount to NAV in that fund was 14 percent.
It all goes back to fund size and selectivity. Could we deploy twice as much capital in the same strategy? No, we’d be forced into where the market is more efficient and we wouldn’t be able to buy at the right prices, or where we would have to take more risk. Neither is a place we want to be for our limited partners.
Why would someone sell a good asset?
This is one of the seminal questions of the secondaries market going back to its roots. For the most part, institutions tend to sell not because something is happening to a fund they own, but because something is happening to them. Reasons to sell could be regulatory, organisational changes, proactive portfolio management or liquidity needs. Sellers tend to sell what may even be better assets to get a better price, rather than selling underperforming assets at a poor price. We believe we can be effective in selectively cherry picking good assets that tend to be mature, with near term liquidity events, at compelling prices.
What’s your view on the current state of financial markets?
We’re facing a dichotomy of extremes that I’m not sure I remember ever seeing. On the one hand, we have markets pricing assets to perfection, assuming that the world is a very benign place. On the other hand, when I wake up in the morning and read the newspaper, the world seems anything but benign. People are more anxious than I have seen in a long time, and that probably extends to how investors are feeling these days. My guess is that dichotomy won’t persist over the long term. Either markets are right and we have to get used to a noisier President or markets have significantly underpriced geopolitical risk and at some point they’re going to have to adjust to the realities.
What is the retail opportunity in private equity and particularly secondaries?
In general, retail investors have no exposure to alternatives. There’s a reason that the world’s most sophisticated institutions have allocated large sums to private equity because it’s delivered over time. You have this huge segment of retail capital, probably larger overall than the institutional segment, that has no access to private equity. For many retail investors, it is difficult to lock up capital for extended periods and finding a product that gives frequent liquidity is difficult.
Today, you’re seeing more of the biggest players in private equity trying to provide access to retail investors. They’re doing it for a reason. Certainly there are hurdles to get there and no one has it completely figured out. Hopefully, one day it will get to a point where retail investors can easily access private equity, opening up trillions of dollars in capital not just in the US, but in Europe and Asia as well. It will be interesting to see how it plays out.
How has Pomona tackled the retail offering with its listed Pomona Investment Fund?
We believe that being a private equity secondaries manager brings us closer to being a good fit with the retail and retirement markets than other private equity strategies. Is it a perfect mouse trap? No, but I would argue that we have come closer than buyout or fund of fund strategies. With secondaries, investors have the ability to mitigate the J-Curve completely and instantly diversify across strategies, GPs and vintages. We are finding a way to introduce private equity investing to a new segment, and it is an ongoing exercise. The Pomona Investment Fund is an open-end fund that has been growing, and we are looking forward to the opportunities ahead.
This article is sponsored by Pomona Capital and appeared in the Perspectives 2018 supplement in the December 2017/January 2018 edition of sister publication Private Equity International.
Credit Suisse has appointed a former Evercore secondaries professional in its New York office, Secondaries Investor has learned.
Sameer Shamsi joined the investment bank's private fund group as a director in December, according to two sources familiar with the matter.
Shamsi left Evercore in March where he was most recently a managing director, as Secondaries Investor reported. Shamsi joined Evercore in 2013 from UBS and worked on sales of portfolios of direct interests, fund and GP restructurings, and stapled deals, according to his Linkedin profile.
Credit Suisse lost its global head of secondaries advisory, Mike Custar, in January. He was replaced by Mark McDonald, who left to rebuild Deutsche Asset Management's secondaries team in November.
The bank's secondaries advisory team includes directors Chris Areson, who assumed responsibility for the Americas when McDonald left, and Jonathan Abecassis, who now heads EMEA and Asia. The secondaries advisory unit is part of the private fund group, which is led by Michael Murphy and Kevin Naughton.
Credit Suisse declined to comment.
Two former Coller Capital partners have started a secondaries firm and aim to raise a fund focused on GP-led restructurings, Secondaries Investor has learned.
Sebastien Burdel and Luca Salvato have launched Spring Bridge Partners, according to three sources familiar with the matter. The firm was registered with the UK's Companies House in May, with Burdel listed as its officer.
The firm is seeking as much as $500 million for the vehicle and Burdel and Salvato have been speaking to potential limited partners, according to one of the sources.
Burdel and Salvato were investment partners at Coller until July 2016 when they left the secondaries firm after 13 and 16 years respectively, as Secondaries Investor reported. Their departures were amicable and prompted by Burdel and Salvato choosing to pursue new opportunities outside Coller, rather than wanting to commit to continuing in senior positions for another five to 10 years, the secondaries firm said at the time.
Burdel and Salvato did not return requests for comment.
– Rod James contributed to this report.
One increasingly popular non-traditional secondaries trade happening in the private real estate market today is the sale of fund positions to investors which are keen to take ownership via a new, often lower risk-return profile investment structure managed by the original investment manager.
While these transactions can meet the needs of investors and managers alike, they also can come with inherent conflicts, which is where advisors like the Accord Group come in. Desi Co, co-founder of advisory business Accord Group, speaks to sister publication PERE.
What exactly is a non-traditional secondaries transaction?
Desi Co: There are two varieties of managers pursuing fund recapitalisations. One is managers that have assets in a fund at the tail-end of its life and have limited ability to move forward with growing their business without a recapitalisation. Their challenge is to deliver on their fiduciary promise of delivering the highest value possible for their existing investors and, yet, at the same time, receive an invitation by new investors to remain as the operator. At the end of the day, some of these operators are capable, experienced and knowledgeable about the assets being sold. The new buyer recognises that skill set and re-invites them to manage them, even if they previously faced challenges both within and outside of their control. There have been a number of managers that have used this method as a way to extend their activities in a space following hiccups from the GFC.
Next, I think you are seeing a wave of managers that have superlative track records. They are not looking at these types of executions as a way to stay alive but rather to affect some portfolio management. A lot of assets have now transitioned and been successfully brought from an opportunistic and value-add risk profile down to more of a core-plus risk profile. The manager would not typically want to sell the real estate as it’s very difficult to repurchase these assets in the open market.
There is often another business plan that needs to happen now for these properties and a lot of managers would like to continue on that journey even though the returns might be lower. Through these types of situations, we have created an opportunity to allow the manager to fulfill its fiduciary obligation and also continue their property business plans, with new capital that wants a lower risk profile. That’s a very exciting evolution. We have done a number of these in the last year or so and that is where you are going to see a lot more activity going forward as the GFC begins to fade into the sunset.
How are these transactions brokered?
DC: At our shop, we run a very traditional sell-side M&A process where we have a universe of buyers who we reach out to. We have a fairly detailed instruction letter that we ask everyone to comply with, and we provide information to all interested bidders via a virtual data room. We then ask investors to provide bids by a certain deadline to get the highest and best possible prices for our clients.
How much do fund managers have to consider potential conflicts of interest in these types of non-traditional secondaries transactions?
DC: Conflicts in and of themselves can be relatively pervasive in the business. I think the key to managing those conflicts is transparency and communication. It is critical to communicate issues clearly and succinctly to existing LPs that may be on the exiting side of a given process. This is where Accord has worked for all the stakeholders, serving as objective validation for the transaction.
We discussed the manager’s motivations, but are investors generally receptive to the concept?
DC: It is growing in acceptance and that acceptance has resulted in a lot of LPs successfully exiting at a premium to the last reported NAV. In some cases, investors that have undergone this process are recommending us to have a look at other portfolios where we can unlock the real estate, on the one hand, and also provide additional growth opportunities for the GP, on the other hand
For instance, in one European transaction, we ran a very focused, but competitive, process. We did generate a premium to NAV. I won’t say how much, but it was a significant figure. On the back end of that transaction, one of the LPs recommended us for another process that we are about to wrap up now.
Real estate is a smaller market in the secondaries space than private equity, but it is evolving quickly. It’s no longer just about LPs seeking liquidity out of the GFC, but a lot more about the tactical use of secondaries by large institutional investors, as well as smaller ones. It might be to pare back certain exposures, or free up capital in a non-distressed way, which is all helpful in showing the value of the secondaries marketplace. There is no longer a stigma when looking at the secondaries market, whereas there was one, say, five years ago. LPs now consider secondaries as just another portfolio management tool.
What advice would you give investors thinking about undertaking a non-traditional secondaries deal?
DC: For an existing investor, I think it’s important to look at what you have invested in from a 360-degree view. What I mean is that, while, of course, you should expect the best possible price, you should also consider the wider relationship with the general partner, to the extent these types of transactions give you a strong outcome on valuation and makes your general partner a stronger, more durable franchise, because they have been able to enter an adjacent business in the core-plus space. I think that could yield a win-win opportunity for both parties.
In this market, there is a premium placed on portfolio size and I think it is also true that the largest check writers for these large-scale transactions tend to be folks without operating capabilities. It’s quite natural that you would see many large investors want not only a portfolio of difficult-to-assemble assets, but also the expertise of a very strong operator. So they would want to continue to use the incumbent manager, which again might create that win-win. So, to LPs, I’d say: a secondaries transaction may actually yield the better outcome relative to a 100 percent sale. Also, we are seeing non-traditional secondaries being used for partial cash out situations where it makes sense for the investors to take some money off the table now while allowing a part of the original investment continue. I think non-traditional secondaries have a very big part to play, especially at this stage of the cycle.
And advice for the fund managers?
DC: For the manager, first and foremost, you have to work with the utmost integrity and never forget your fiduciary duty. Be extremely transparent, even over-communicate. I’d say, in this environment, there is an opportunity to achieve both objectives: do all you can and should do as a fiduciary and grow your franchise. In this instance, transitioning from being a pure opportunistic or value-add manager and getting into a lower risk space is possible. But, you can never forget your fiduciary duty.
I see a lot more of this type of activity happening as long as the cycle remains supportive. That’s what we all have to think through – where are we at in the cycle and what is the best way to capitalise on behalf of all stakeholders?
This article is sponsored by Accord. It appears in the December issue of PERE magazine.
The secondaries market continues to deliver surprises and this year was no exception, with massive stapled deals, headline GP-led processes, and fundraising and deal volume set to break records.
The wider macro environment was so full of “known-unknowns” – Brexit negotiations, the Trump administration tax plan, rising North Korea tensions – that many players adopted a “keep calm and carry on” attitude, despite whispers of an impending downturn.
As we all prepare to take a few well-deserved days off to celebrate the holiday season, it’s time to reflect on the highs and lows of the last year – and cast your vote in sister publication Private Equity International's annual awards.
Few will contest that 2017 was a watershed year for GP-led processes. Brand-name primary managers began using them to help with fundraising through stapled deals, and fund restructuring have continued to make headlines.
By 7 December, 23 funds had raised $29.8 billion for private equity secondaries alone, racing towards last year's record high of $33.9 billion across all asset classes.
In a year when fundraising and deal volume are expected to set new records, which transaction deserves to be named ‘Secondaries Deal of the Year’? Which buyer made the biggest waves? Which advisor has been pushing the envelope? And which law firm has been making transactions happen?
With more than 70 categories across three regions, including 12 for secondaries, you’re encouraged to vote in any category you feel you’re qualified to judge. You will notice plenty of familiar categories, as well as a new global section.
To help you navigate the voting process we’ve drawn up a shortlist for each category based on our coverage throughout the year, our conversations with the market and your submissions. You can also add your own choice, if you feel that the rightful winner isn’t on our list.
The rules for voting are simple: you may only vote once; you may not vote for yourself or your own firm nor engage in block voting; and non-corporate email addresses will be discounted (so, no Hotmail or Gmail entries). The polls close on Friday 5 January, with results revealed in March.
We can't wait to find out your thoughts. TO START VOTING, VISIT OUR AWARDS PAGE
The US Securities and Exchange Commission is to shift its enforcement focus to protecting retail investors’ interests, lessening the spotlight on internal compliance matters for private fund firms, according to law firm Proskauer.
In a client note presenting the enforcement outlook for 2018, the law firm said chairman Jay Clayton’s focus on retail investor protection in recent speeches narrows the enforcement approach by the regulator to private funds managers.
Clayton has “repeatedly stated that the ‘analysis starts and ends with the long-term interests of the Main Street investor’,” Proskauer noted. “With this end in mind, it appears that the focus relative to private funds will be on areas where retail investors (including pension funds and retirement plans) have access to non-public offerings.”
Enforcement priorities for private funds in 2018 will single out valuations practices and the compliance of gatekeepers used by fund advisors including custodians and administrators. There will be a continued focus on the sufficient disclosure of fees and expense allocations, the note said.
The note also detailed additional changes to SEC exam procedure, with surprise exams being conducted by the SEC’s Boston office and “sweep examinations” focusing on initial public offerings, private credit financing and electronic messaging compliance.
The outlook also described the typical exam format taken by the SEC this year. Fund advisors are subject to one week on-site visits for inspection, with two weeks’ advance notice and a two or three hour introductory call from the SEC. Following an on-site visit, the regulator sends queries for firms to answer for a period of up to six months.
Ardian is planning to launch an $8 billion mature secondaries fund in the second half of next year, sister publication Private Equity International has learned.
Generation Mature Secondary FoF will target European and US vehicles, according to an Ardian document from May outlining the firm's funds seen by PEI. The firm defines secondaries funds of funds as vehicles that acquire direct stakes in older European and US private equity funds and portfolios of stakes in unlisted companies, its website noted.
The document does not list a hard-cap for the vehicle.
Mature secondaries and tail-end stake purchases refers to acquiring interests in funds with less than 30 percent of unrealised value versus capital commitments, or being more than nine years old, according to intermediary NYPPEX Private Markets. Other sources define the strategy as situations where investors are in need of liquidity, the general partner needs more time for value creation and the buyer typically acquires all remaining stakes in the fund.
Firms including Schroder Adveq are raising funds dedicated to the strategy.
Ardian has acquired several large portfolios this year including a private equity portfolio worth around £800 million ($1.1 billion; €907.5 million) from Universities Superannuation Scheme, one of the UK’s largest public pensions, as Secondaries Investor reported in December.
The firm is understood to be seeking $1.2 billion for its latest early secondaries fund, a strategy which involves purchasing interests in funds that are almost completely unfunded. As of June the 2016-vintage fund was 13 percent committed and 6 percent called based on the target.
Ardian is investing its $14 billion ASF VII fund which includes $10.8 billion for secondaries. The fund – which included commitments from California State Teachers' Retirement System, Florida State Board of Administration and Caisse de dépôt et placement du Québec – was 34 percent committed across nine deals as of June.
The firm declined to comment.
EQT's stapled deal on its latest Asia-focused fund also included stakes in its 2015-vintage flagship, UK regulatory filings have revealed.
The Stockholm-headquartered investment firm had offered limited partners in its 2011-vintage €4.8 billion EQT VI the opportunity to sell their stakes to Partners Group in a deal that involved commitments to EQT Mid Market Asia III, Secondaries Investor reported in September.
Partners also acquired stakes in the €6.75 billion EQT VII, according to two filings from November.
Selling LPs from EQT VII included Fubon Life Insurance Company; Longbow Finance, which backs the Sauber Formula One team; the Local Pensions Partnership; and Guardian Life Insurance Company of America, the filings show.
Partners used its 2015-vintage Partners Group Secondary 2015 fund to invest in the deal and picked up the stakes in EQT VII through its Partners Group Barrier Reef Access 12 and Partners Group Exchange Access vehicles, according to the filings.
The firm was selected as the sole buyer through a competitive bid process and LPs in EQT VI who decide to part with their stakes received a 19.5 percent net internal rate of return and a 1.8x net money multiple, Secondaries Investor reported.
EQT Mid Market Asia III was close to reaching its $800 million hard-cap in September, a source told Secondaries Investor at the time. It is understood that Partners had already committed to Asia III before taking part in the staple.
It is also understood that EQT did not hire an advisor to work on the process.
EQT VII has invested in healthcare technology company Certara, UK veterinarian chain Independent Vetcare and German property services firm Apleona, among others.
Both firms declined to comment.
Asia’s secondaries market is coming of age in more ways than one, with growing structural sophistication and a host of opportunities for proactive players in the space.
The region’s current supply generally involves funds with vintages between 2007 and 2012, which are rapidly approaching maturity. Commitments in these funds are larger in size than those commitments made in the pre-2007 era, and are more diverse both in terms of geography and fund manager type. Once seen as coming from esoteric managers or large Pan-Asia funds and few in between, they now comprise a vast array of country-focused fund secondaries opportunities, particularly in the mid-market space.
[caption id="attachment_22179" align="alignleft" width="180"] Charles Wan[/caption]
For market participants, this requires a nuanced understanding of the six private equity market-relevant economies: China, India, South-East Asia, Australia, Japan and South Korea – and an appreciation for each opportunity independently.
The skillset of a secondaries buyer now leans more towards capturing information asymmetry and creating information advantage. Gone are the days of deep discounts to lock in profit on day one. We are seeing transactions in Asia range between a premium to NAV of 5 percent to discounts in the high teens, with very little transacting outside of this band. Today it’s all about buying well – which in practice is extremely difficult to execute.
In Asia, having some degree of geographical and sectorial expertise is therefore a determinant factor towards how successful an operator can be. A range of variables – regulatory volatility, exchange listing rule changes, accounting policy differences, valuation discrepancies or poor GP reporting quality, to name a few – mean investors in Asian secondaries need to be savvier than their western counterparts. Some see these as risks, while others see them as opportunities; it’s a double-edged sword.
In Japan, different accounting principles can be a challenge. J-GAAP can make it difficult for GPs to mark-up valuations unless a completed M&A valuation or up-round event occurs, and dual-currency vehicles may find valuation differences between a yen-denominated fund with J-GAAP accounting versus its US dollar-denominated counterpart of the same fund series. Secondaries buyers need to go the extra mile during diligence to ascertain true value, but this could mean that having local currency capability allows investors to take advantage of special situations.
Another regulatory challenge has surfaced this year in China, where listing rules have capped public sale of stock by an investor at a maximum percentage of not more than 12 percent per annum. Secondaries buyers need to be attuned to sudden regulatory changes like this that can drastically change the outcome of pricing exit expectations overnight, particularly deals in process.
As Asian banks’ and managers’ appetite for global private equity grows, many sellers are selectively liquidating a portion of their maturing portfolio in order to re-deploy this capital to take part in a new wave of global private equity or venture capital commitments. Partial exposures are thus becoming more common as investors seek liquidity to dip their toe from one pool to another.
In Australia, we are seeing asset managers and superannuations consider selling their private equity exposures on an opportunistic basis. This comes amid the country’s regulatory requirement to report management expense ratios, encompassing management fees across all asset classes paid to underlying fund managers. Since commitments to private equity managers drive up average reported MERs considerably, there has been intense competition and pressure among asset managers to lower MERs for other products such as fixed income. As such, MERs have been a driver of secondaries selling in Australia for some time.
This year, we are seeing a refocus on opportunistic selling that takes advantage of the current seller’s markets in secondaries. Atlantic-Pacific worked on a transaction to assist an Australian asset manager re-balance its portfolio via secondaries this year.
Having been active in Asian secondaries over the last decade, at Atlantic-Pacific we have seen structures become increasingly creative and sophisticated; secondaries players have become more proactive in gaining sectorial or geographical advantages. In this year alone, Atlantic-Pacific has represented Asian sellers aggregating over $600 million in NAV. As investors’ primary allocation to Asia now typically targets 20 percent – up from the 5-10 percent that used to be the norm – secondaries will continue to become a staple of the private equity landscape, and are poised to grow two to threefold over the next decade.
Charles Wan is a principal at Atlantic-Pacific responsible for deal origination, execution and product distribution across Asia. He leads the Asia office’s origination and due diligence activities relating to its primary capital raising and secondary transactions in the region and has prior experience at Pomona Capital in Hong Kong.
Special situations funds are in demand going into the new year, according to a survey seen exclusively by sister publication Private Equity International.
In a fourth-quarter report published by placement agent and advisor Asante Capital Group, more investors expressed an interest in buying special situations funds than real assets – which encompasses such asset classes as infrastructure, real estate, energy, timber and agriculture – and private debt.
Their popularity is due to expectations of a change in market conditions during 2018 and the funds trading at discounts due to their underlying complexity, according to Asante managing partner Warren Hibbert.
"The interest in special sits is potentially relative to where we are in the cycle, where some view there being significant upside ahead that may not be reflected in the portfolio carrying values," Hibbert said. "This is in contrast to core infra and real estate where the asset values are easier to define."
Buyout funds remain the most popular among buyers, followed by growth capital and venture capital, according to the survey.
Source: Asante Capital Group
Almost half of respondents said that they were likely to carry out a direct secondaries transaction (48 percent), either as a buyer or seller in 2018, while 41 percent envisaged taking part in a complex transaction such as a restructuring or tender offer.
Almost all respondents expect to buy or sell an LP interest next year.
It is not clear how many of the 112 senior investment professionals in Asante's survey responded to the secondaries questions.
According to the report, the increasing popularity of less traditional secondaries transactions "reflects a maturing secondaries landscape as players seek to maximise liquidity and option-value in an increasingly congested market."
LGT Capital Partners managing partner Tycho Sneyers has been elected to the UN Principles for Responsible Investment board.
In his role as investment representative, Sneyers will be one of only two non-asset owners on the board, according to a statement. He was elected with 25 percent of the investment manager vote, edging out Therese Niklasson, global head of ESG at Investec Asset Management and Carol Geremia, president (designate) at MFS Investment Management.
Sneyers helped integrate responsible investment considerations into the LGT private equity programme in 2002, his candidate statement noted. He also served as chairman of the firm's ESG programme.
"I believe there is a need on the board for someone who has been 'in the trenches' on ESG integration, slogging through the challenging issues of turning ESG aspirations into operational reality," he said in the statement.
"Having ESG action plans for each portfolio company linked to standardised ESG key performance indicators would enable stakeholders to understand the real impact of their investment decisions. It would also be a big step towards further institutionalisation of ESG across all asset classes."
The vote – which closed on 28 November – resulted in Marcus Madureira, planning director at Brazilian pension fund PREVI, being confirmed as an asset owner representative for a first term. Madureira was joined by Renosi Mokate, chairperson of the South African Government Employees Pension Fund, and California Public Employees' Retirement System board member Priya Mathur, who were elected to serve second and third terms respectively.
The newly elected directors will start their three-year terms on 1 January 2018. The board's responsibilities include setting the PRI's strategy, risk appetite and structure, as well as its monitoring performance.
Launched in 2006, the UN's PRI now has more than 1,750 signatories representing approximately $70 trillion.
Chicago-headquartered Adam Street Partners plans to push further into north Asia and tap investor opportunities with its new office in Seoul, its fourth in the Asia-Pacific region.
Chris Cho, a principal at the firm, will head the newly-opened outpost and will focus on developing institutional client and consultant relationships within South Korea as the firm expands its efforts in the country, Adams Street said in a statement.
Ben Hart, partner and business development head in Asia, told sister title Private Equity International late last year that the firm was looking to expand, with Seoul “definitely at the top of the list”.
The investment firm has a roughly 15 percent allocation to Asia and has backed Asia-focused managers including Affinity Equity Partners, KV Asia Capital and ChrysCapital, according to PEI data.
“It is critical for Adams Street to have a local presence so we can appropriately serve our South Korean investors and take advantage of private market investment opportunities in the region,” Jeff Diehl, managing partner at Adams Street, said in the statement.
Cho joins Adams Street from Lazard Asset Management, where he was vice-president in the sales and marketing team, tasked to manage the firm’s relationships with institutional public and private investors, mutual aid associations, and third-party distributors in South Korea. He previously worked for Shinhan BNP Paribas Asset Management and Mirae Asset Global Investments.
Adams Street manages more than $31 billion of assets across primary and secondaries private equity fund investments, co-investments, private credit investments, and direct venture/growth investments.
The firm is seeking $1.2 billion for Adams Street Global Secondary Fund 6, its latest secondaries vehicle, according to PEI data.
Pantheon Ventures has bought five European renewable and concession-based assets in a GP-led deal as European manager Marguerite begins to wind down its first fund.
The London-headquartered firm made the investment through a vehicle named Marguerite Pantheon, which is owned by a pool of funds and managed accounts run by Pantheon, according to a statement. A filing with the US Securities and Exchange Commission by the vehicle in September revealed it has raised $257.7 million from three investors.
Financial details for the deal were not disclosed.
Pantheon has taken full control of the Toul-Rosières 2 and Massangis 1 solar projects in France, each with a capacity of 36MW. It has also taken Marguerite’s 22.5 percent stake in the 288MW Butendiek offshore wind farm in Germany and its 10 percent share of the 326MW C-Power offshore wind site in Belgium.
The non-renewable energy asset acquired by Pantheon is a 45 percent share in the Autovía del Arlanzón toll road in Spain. All five of the projects bought are operational and will continue to be managed by Marguerite.
Marguerite has become the second shareholder to exit the Butendiek wind farm following PKA’s decision to sell its 22.5 percent share to Itochu last year. The Danish pension fund generated a 22 percent net IRR from the investment.
The exits are the first five out of 20 investments made by the €710 million Marguerite Fund, established in 2010 by the European Investment Bank, Poland’s Gospodarstwa Krajowego, the French Caisse des Dépôts Group, the Italian Cassa depositi e prestiti, Germany’s KfW and the Spanish Instituto de Crédito Oficial.
The five banks have now contributed another €100 million each in addition to €200 million from the European Investment Bank to create a second vehicle with a similar greenfield focus on renewables, broadband and transport connections. The fund does not plan to raise funds from private investors.
RCP Advisors has held a second close on its third dedicated secondaries fund, less than two months after Secondaries Investor reported a first close.
The Chicago-based firm has collected $56.9 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 with a $500 million hard-cap.
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. The fund has attracted commitments from 41 investors so far.
The date of first sale was September and the minimum commitment from an outside investor is $1 million, the filing notes.
Fund III launched in July and held its first close in October on $26.8 million. It 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.
RCP usually makes a commitment of around 10 percent of aggregate capital commitments, while the hurdle rate on its funds is between 10 percent to 15 percent, according to a strategy document from the GP.
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 funds of funds, secondaries and co-investment funds, according to its website.
Headway Capital Partners, a London-based specialty secondaries firm focused on direct secondaries, formally opened its Boston office in November – its first overseas presence. Christiaan de Lint, a founding partner, tells Secondaries Investor about his firm’s approach to secondaries and preference for complicated and less obvious deals.
[caption id="attachment_2383" align="alignleft" width="180"] Christiaan de Lint[/caption]
How does North America fit into your deal pipeline and how many deals have you made there over the last 12 months? What made them interesting?
Christiaan de Lint: North America has always been a fundamental part of our strategy. Close to 40 percent of our underlying investments to date are in North America; in the last 12 months, we’ve closed eight secondaries transactions, of which two were in the US. We expect that North America will continue to be a major source of deals for us.
Two of Headway’s founding partners, Laura Shen and Sebastian Junoy, spend a significant part of their time working on US opportunities and we have enhanced our presence with the recent opening of our office in Boston, which will be led by our US Managing Director Cliff Meijer, who joined us two years ago after having been responsible for secondaries at Thomas Weisel.
You recently delisted London-listed cleantech investor Ludgate Environmental Fund. How did you come across this fund and how has it performed so far? Will you do similar deals in the future?
CD: LEF delisted in July following Headway’s tender offer earlier in January. The LEF board was looking to provide liquidity alternatives to shareholders of this tail-end fund – there was virtually no liquidity in the shares despite the AIM listing – and Headway was the ideal partner given its focus on smaller, non-traditional secondaries transactions.
The board recommended Headway’s offer which represented a 25 percent discount to NAV at the time, and 58 percent of shareholders opted for liquidity. The LEF portfolio included some attractive and growing investments that we wanted exposure to and it has performed well so far; NAV has since increased by 35 percent. We consistently look for these types of unusual secondaries transactions.
Headway’s strategy is described as focusing on complex transactions. What does complex mean to you and can you walk us through the types of deals you like? And what is pricing like in this space?
CD: Complex to us includes everything that is not a plain-vanilla purchase of traditional LP positions in well-known funds. We consider direct secondaries, GP restructurings and structured secondaries solutions (like preferred equity structures) to be complex because they require more due diligence, structuring, multipartite negotiations and post-investment management.
We particularly like direct secondaries and structured secondaries because these deals are not pre-packaged and often have to be created; sometimes the due diligence materials aren’t in English, the GPs or sellers aren’t very familiar with the secondaries market and the range of possible liquidity solutions, or a new manager and additional follow-on capital is required post-investment. These deals take much longer to evaluate, structure and execute than LP interest transactions.
That being said, some or our LP interest transactions are also quite complex. In the Global Infrastruktur transaction, we tendered for shares from thousands of retail investors in a structure investing in infrastructure funds. We like deals that other secondaries buyers don’t like, not because the GPs or the assets are of poor quality, but because the deals are messier, more complicated and less obvious. Therefore, they tend also to be more attractively priced.
While discounts in the overall secondary market are below 10 percent, it’s not uncommon to see discounts as high as 50 percent or more in the more complex end of the market where we hunt. But caveat emptor, because a deal with a high discount isn’t necessarily a good one.
What are the biggest challenges facing your part of the market and how do you navigate these? What about opportunities?
CD: Our biggest challenge continues to be resource allocation. There is tremendous dealflow out there, so the challenge for us is always to focus our resources on the best opportunities by ensuring we have a well calibrated filter.
The number and value of assets remaining unsold in private equity funds over 10 years old continues to grow exponentially and a solution is required for these unsold assets. We’re very excited about the opportunity ahead for those groups willing to apply a significant level of expertise to complex situations that require thoughtful creativity and structuring.
Prior to co-founding Headway, De Lint was part of the investment team at Coller Capital where he sourced, evaluated and closed private equity secondaries deals. He has prior experience at Citigroup in London and New York.
Universities Superannuation Scheme, one of the UK's largest public pensions, has sold another portfolio of private equity fund stakes to Ardian as it faces a growing liabilities deficit.
The pension offloaded the bundle worth around £800 million ($1.1 billion; €907 million) to the Paris-headquartered firm in a process advised by Park Hill, according to two sources familiar with the deal.
Details of the portfolio, such as the vintages and strategies, were not disclosed.
This is at least the second large portfolio USS has sold to Ardian. In December 2015, the pension offloaded interests in 13 private equity funds with assets and unfunded commitments worth around £640 million.
That deal involved stakes in funds managed by Bridgepoint, Apax Partners, Trilantic Capital Partners and Bridges Fund Management and was advised by Evercore, as Secondaries Investor reported. Ardian syndicated the deal with secondaries buyers including Lexington Partners and Hamilton Lane, according to UK regulatory filings.
USS has been facing a rising deficit: its assets grew 20 percent to £60.5 billion while its liabilities rose 21 percent to £72.6 billion in the year to 31 March, according to its latest annual report. Liabilities increased amid a falling discount rate and lower yields on index-linked Gilts, the report noted.
In mid-November, USS announced it was forecasting a funding deficit of £7.5 billion based on a revised future average annual returns forecast of CPI + 0.71 percent.
Private equity through pooled investment vehicles accounted for almost £8 billion of USS's portfolio as of 31 March. The pension has a 10 percent target allocation to the asset class, according to PEI data.
Ardian is investing its 2015-vintage Ardian Secondary Fund VII vehicle. The fund, which includes $10.8 billion for secondaries, was 34 percent committed across nine deals as of June, according to a document outlining the fund's performance obtained by Secondaries Investor.
USS and Ardian declined to comment. Park Hill did not return a request for comment.
Cebile Capital, an advisory firm and placement agent, has hired a secondaries advisory professional and 10-year veteran of UBS to lead its first US office.
[caption id="attachment_22132" align="alignleft" width="180"] Steven Westerback[/caption]
Steven Westerback joins Cebile as president and head of the Americas based in the firm's New York office, according to a statement. He was most recently an executive director in UBS's private funds group and had left in December last year.
Cebile's New York office "will allow us to expand our penetration of the North American market, providing greater coverage of institutional investors for our GP placement clients and better enabling us to solve the liquidity needs of limited partners,” said managing partner Sunaina Sinha.
At UBS Westerback led deal teams and advised on more than 25 secondaries deals globally exceeding $12 billion of value, and his experience includes primary capital raising, tender offers, competitive auctions, team spin-outs and complex structured transactions, according to Cebile's website.
He has prior experience at Paul Capital Partners and Morgan Stanley Alternative Investment Partners.
In November UBS hired Jarid Colucci, a vice-president in Goldman Sachs Asset Management, as a director in its private funds group.
Around half of Cebile's completed secondaries deals, which number more than 12, have been in North America, Sinha told Secondaries Investor. The firm plans to hire between three and five staff in New York and has worked with six GPs on primary placements in North America.
Cebile also plans to open an office in Hong Kong within the next 12 to 18 months and will hire as many as five staff there, Sinha said.
London-headquartered Cebile was founded in 2011.
– This story has been updated to reflect that Westerback joined as president and head of the Americas and that he left UBS in December 2016.
It was a job advert that didn't seem quite right.
"Business Manager within Secondary Fund Investments. Deutsche Bank – London. In your role as Business Manager you'll be working closely with Secondary SOF Senior Management/Global Chief Operating Office..."
The posting, which appeared on various recruitment websites in mid-October, was puzzling. Given that Deutsche's secondaries unit had spun out just two months prior, why would the firm now be looking to staff up a non-existent team? The answer was simple: Deutsche was getting back into secondaries.
The man leading that effort turns out to be Mark McDonald, Credit Suisse's former global head of secondaries. We caught up with him this week and learned he is planning to staff up in the US and Asia-Pacific, as well as Europe, and that he already has members in his team. If you missed it, you can find out more in our Q&A with him here.
McDonald's appointment piqued our interest for two reasons. One, advisory to buyside moves are relatively rare. Jumping the other way is much more common, such as: Park Hill's head of secondaries Jonathan Costello, who joined from Morgan Stanley Alternative Investment Partners; Rede Partners' Dushy Sivanithy who joined from Pantheon; and Jarid Colucci, who left Goldman Sachs AIMS to join UBS. McDonald's move to Deutsche is in fact a return: he had spent more than eight years at secondaries firms Keyhaven Capital Partners and Pomona Capital prior to Credit Suisse.
Two, the spin-out to form Glendower Capital in August suggested Deutsche was exiting secondaries. We now know this was not the case. In addition, Deutsche AM remains the regulated manager for the private equity secondary opportunities funds and has "ultimate regulatory responsibility for portfolio management, risk management and investor relations", while Glendower remains the advisor to these assets, says McDonald.
An interesting point to note is that Glendower retains carry and partial management fees from the SOF programme, although regulatory responsibility for the portfolio resides with Deutsche AM.
Sources close to the firms stress that Deutsche and Glendower remain aligned partners. Anyone who has seen Glendower's business cards will recognise a familiar shade of blue used in its logo. In fact it is almost exactly the same pantone Deutsche uses in its square logo – a deliberate sign of continuity, we understand.
Might things get awkward when they both hit the fundraising trail, let alone compete on deals? Glendower has already registered a vehicle – Glendower Capital SOF IV – in the Cayman Islands, according to a filing. McDonald declined to comment on fundraising, but said the firm was considering various options.
The secondaries world is both competitive and collaborative, as one source put it. We hope they're right.
What do you think of Deutsche AM rebuilding its secondaries team? Let us know: firstname.lastname@example.org or @adamtuyenle
New Jersey State Investment Council has approved a recommendation from its Division of Investment to commit up to $135 million to a dedicated vehicle managed by Denver-headquartered Aether Investment Partners.
The Aether Real Assets SONJ Fund, a fund of funds, will make primary, secondaries and co-investments in both agriculture and timber in addition to metals, mining, oil and gas, according to a 22 November memo by director and chief investment officer Christopher McDonough.
McDonough wrote in the memo that the Aether Real Assets SONJ Fund will have a particular focus on vehicles targeting the upstream segments of natural resource sectors that have a positive correlation to commodities.
“Over a full market cycle, the fund targets to outperform the Bloomberg Commodity Index by 12 percent to 15 percent net, a portion of which will come from annual yield,” McDonough wrote. “Aether will prosecute its strategy by investing in primary funds, secondary market opportunities and co-investments.”
The vehicle will have a 4.5 percent carry, a 7 percent hurdle rate and management fees of 0.60 percent on committed capital over the first five years, 85 percent of the prior year’s fee during years six to 12, and 0.10 percent on committed capital during years 13 through 15, according to the memo.
In the memo, McDonough described how the investment is motivated by the $76 billion NJSIC’s desire to diversify its exposure to energy price risk and complement its existing private equity-like risk/return profile. McDonough touted Aether’s opportunistic global approach, highlighting that the firm’s focus on funds with less than $1 billion in assets under management would complement NJSIC’s own existing sourcing efforts.
“Aether believes that investment returns and alignment of interests between fund managers and investors are generally better with investments in smaller funds that are managed by teams that possess deep operational and/or technical expertise,” according to the 2015 annual report of Treasury Group Ltd., an Aether investor.
NJSIC worked with TorreyCove Capital Partners as its real assets consultant and Aether has not engaged a placement agent, according to the memo.
In 2013, NJSIC committed $30 million to Aether Real Assets III and $100 million to Aether Real Assets III Surplus, vehicles that produced net IRRs of 14.2 percent and 16.7 percent respectively, according to McDonough’s November 22 memo.
Aether was established in 2008 and provides real assets exposure to clients that include public and corporate pension funds, endowments and high-net-worth individuals. Within agriculture and timber, the firm has a preference for production-orientated strategies and will also consider investments in products, services and midstream assets, according to its website. It also invests in oil and natural gas, metals and minerals and will consider other sectors with similar characteristics such as alternative energy, power and water.
Aether and NJSIC representatives declined to comment.
Nordic Capital's proposed restructuring of its 2008-vintage fund has attracted bids in a process keenly watched by primary and secondaries market participants alike.
Buyers submitted first round bids last week in the process involving the Scandinavian buyout firm's €4.3 billion Nordic Capital VII fund, according to two sources familiar with the transaction.
Nordic began exploring options for a GP-led process in September and was working with advisor Campbell Lutyens, Secondaries Investor reported. The transaction would involve moving the remaining 10 unlisted assets, which have a net asset value of around €2 billion, into a multi-year continuation vehicle which could have a five-year term, sources said at the time.
Fund VII holds 14 assets, four of which have been publicly listed, according to Nordic’s website.
The deal progressing to first round bids is significant – several high-profile primary managers have used the secondaries market this year to run processes on their existing funds, and GP-leds are expected to comprise a significant proportion of deal this year's deal volume. Market participants are predicting a record year of at least $42 billion and as much as $50 billion.
Apax Partners' cancellation of its proposal to run a GP-led process on its 2007-vintage €11.2 billion Apax Europe VII fund may have put a pause on the momentum for GP-leds, and primary managers are watching the Nordic deal with keen interest, the London-based head of secondaries at a global investment firm told Secondaries Investor.
"These conversations [around GP-led processes] are becoming very commonplace," the head said. "Whether these lead to substantial growth next year, for the brand name managers, depends on public perception of these deals. That will be driven by some of the high profile ones and how they turn out."
Primary managers are also keeping an eye on high-profile GP-led deals.
"It's clearly part of the landscape that didn't exist three years ago," said the managing partner of a London-based mid-market buyout firm that is fundraising. GPs are increasingly being asked by potential investors about whether they might consider running a process on an existing fund, such as through a stapled deal, the managing partner said.
"It's a question we're always being asked. Everyone raising a fund of funds wants co-investments and secondaries because that's how you mitigate the J-curve."
Nordic Capital and Campbell Lutyens declined to comment.
Mark McDonald, Deutsche Asset Management's newly appointed secondaries head, joined the investment bank in November to rebuild its team following the unit's spin-out that formed Glendower Capital. He tells Secondaries Investor about his plans.
[caption id="attachment_3098" align="alignleft" width="248"] Mark McDonald[/caption]
What sized team are you planning to build and which part of the secondaries market will you focus on?
We have a team of 10 and will build on this in the new year. The plan is to leverage the multi-disciplinary skillsets and relationships of the team in direct, fund and secondaries private equity investing as well as legal, advisory, investor relations and operations. Our thesis is to access attractive assets in unique ways; being more of a partner in providing solutions versus a more “traditional” secondaries investor.
Do you have plans to raise a fund or invest deal by deal? If raising a fund, do you have a target in mind?
While we cannot comment on future fundraising, it is our mandate to serve the private equity needs of our investors in a fiduciary manner. We are considering various options and formats to fulfill this mandate.
What was attractive about the Deutsche platform that enticed you to join and rebuild its private equity secondaries team?
I saw a global platform which was reshaping its private equity offering to be aligned with the growth and innovation in alternatives. It’s rare to get the opportunity to build a business from the ground up, which marries the entrepreneurial, insightful and strategic – but is also robustly institutional and with an experienced team in place. As I look at how the market is developing – and will continue to develop over the coming years – I believe this is a powerful combination to do something that can deliver strong returns through a truly differentiated strategy.
Your title is global head of secondaries. From which other global offices will your team operate from and what are your plans for staffing up those offices?
The core of our team is in London, but with Deutsche Asset Management’s global presence, we’ll look to access opportunities through various channels and relationships and develop our teams in the US and Asia-Pacific depending on the opportunity set.
How do you see your recent experience on the advisory side playing a role now on the buyside?
I had 14 years of buyside investment experience before the advisory side, which I think was helpful in getting all of our deals over the line, as well as winning awards for some innovative, landmark transactions. Returning now to the buyside, I feel that I gained a unique 360 degree perspective which, combined with our team’s global investment experience, can be used for the benefit of future investment partners.
What is your vision for your new team and how will it be different to the previous team that spun out in August?
We aim to be an entrepreneurial, best-in-class solutions provider versus a more “traditional” secondaries investor. We will continue to partner with the prior team (now Glendower Capital) with whom we have entered into a portfolio management services agreement since August. Deutsche Asset Management remains the regulated manager with ultimate regulatory responsibility for portfolio management, risk management and investor relations for the $2 billion Private Equity Secondary Opportunities Fund “SOF” programme.
Mark McDonald is global head of private equity secondaries at Deutsche Asset Management based in London. Prior to joining, he spent four-and-a-half years at Credit Suisse where he was most recently its global secondaries head, and has experience at Keyhaven Capital Partners and Pomona Capital.
Sacramento County Employees’ Retirement System is in the process of exiting its core separate accounts to bring diversity to its real estate portfolio.
The $8.6 billion pension system is planning to trade its six core separate accounts for a stake in an open-ended core fund that it has yet to pick, according to documents released in November.
SCERS and its real estate consultant, Cleveland-based Townsend Group, began considering how to pare down its core real estate separate accounts in January. The pension system is planning to invest in core real estate solely through fund structures.
“SCERS and Townsend believe that the dispersion of returns within core real estate, whether by separate accounts or open end commingled funds, is not significant,” chief investment officer Steve Davis told sister publication PERE.
The pension system has not previously sold multiple separate account properties in aggregate, he said.
SCERS explored both a sale of the separate accounts and a swap for a stake in a core vehicle. The pension system picked the latter option to gain immediate exposure to an open-ended fund; to expedite the sale process compared with exiting the assets individually; and to save on third-party commissions, according to pension documents. The estimated gross asset value of the properties was about $466 million as of 30 June, according to Townsend.
The open-ended core manager will buy the six assets, and the proceeds – which SCERS expects to total about $250 million – will be reinvested in that core manager’s open-ended fund.
Townsend started the swap process by gauging the market’s interest to participate in the deal, sending 17 invitations to open-ended fund managers to garner feedback. Out of that group, 13 responded positively and Townsend cut the list to seven potential managers.
The consultancy is evaluating the managers for their fit with SCERS’ real estate objectives and for which manager will bid highest for SCERS’ assets. Townsend is also obtaining property appraisals for the separate account assets, which range from a fully-leased Seattle office to an 81 percent-leased industrial property in Houston. BlackRock manages five of the assets and Barings manages the other property.
The transition is expected to be implemented in the first quarter of next year, Davis said.
“It seems like a no-brainer to try as the pension fund would potentially trade a concentrated core portfolio from an asset perspective to broadly diversified core fund, albeit with a single manager,” one secondaries executive who is not involved with the deal told PERE.
“But it may be cumbersome to orchestrate unless SCERS is willing to contribute the assets at a nominal discount to appraised value,” the executive added, noting few core funds would likely want to buy all of the assets.
SCERS managed $723.5 million, or 8.4 percent of its portfolio, in real estate, as of 30 June, including interests in seven core funds totaling $333 million.
One executive at a US-based secondaries firm likened the deal to one executed last year by San Francisco Employees’ Retirement System, in which the pension system transferred a $700 million real estate separate account to CIM Group from Deutsche Asset Management, as PERE previously reported. The executive noted that separate account had underperformed under Deutsche, with the assets now managed by an open-ended CIM vehicle.
SCERS’ separate accounts returned 10.9 percent net in the year ending 30 June and 4.6 percent since their September 2008 inception, according to the pension’s half-year report.
The UK’s Pensions Infrastructure Platform has secured a deal worth more than £400 million ($532 million; €447 million) for a portfolio of 10 PPP projects from a former Aberdeen Asset Management fund.
The assets include three road projects, three waste facilities, three hospitals and a social infrastructure project, with each site containing equity stakes of between 30 percent and 50 percent.
They were invested in and built through Aberdeen UK Infrastructure Partners fund, a 2012-vintage vehicle which was closed in March 2015 on £189.5 million, according to the Strathclyde Pension Fund, which became an LP in the vehicle following a secondary purchase from Lloyds Bank.
The Strathclyde scheme said the fund was reduced to its final size following a review revealing limited opportunities at the larger end of the market. It had a targeted return of 12 percent.
PFI projects have come under the spotlight in the UK recently following plans revealed by the opposition Labour Party to nationalise all existing contracts. Mike Weston, chief executive of PIP, was unperturbed on the matter.
“We believe assets like these require maintaining good relationships with the private sector and have benefits to all sides,” he told sister publication Infrastructure Investor. Weston added that the acquired assets are not the high-profile contracts that have drawn the ire of Labour.
The deal by PIP is its largest single transaction to date and was backed by seven investors through the Multi-Strategy Infrastructure Fund. The seven pension funds behind the deal include four of its founding members: Strathclyde, British Airways Pensions, Railpen and the West Midlands Pension Fund. PIP declined to disclose the identities of three new investors who participated in the scheme.
The MSIF originally targeted commitments of £1 billion, although this was downsized to £600 million following a divergence of strategies of some pension funds. However, it has now secured funds totalling £750 million and is open until the end of the first quarter of next year. The latest deal significantly diversifies the fund, which had previously been deployed into several solar and wind transactions, as well as ferry operator Red Funnel.
Infrastructure secondaries accounted for around 8 percent of deal volume last year, according to a survey by advisory firm Evercore.
Prudential Financial, the US's largest life insurer, wants to hire senior investment professionals with secondaries experience in its Newark headquarters.
The firm's alternative assets group is seeking a senior vice-president and a vice-president of private equity funds, co-investments and secondaries, according to two job postings on its website.
The positions will report to the head of private equity and co-investments and involve originating primary private equity fund, co-investment and secondaries opportunities; leading the deal team in evaluating and underwriting such investments; and working with counsel to negotiate the terms of limited partnership agreements and side letters.
The senior VP and the VP must have more than 12 years and eight years of respective experience across private equity funds, co-investments and secondaries, as well as knowledge of partnership documentation, accounting and taxation, among other requirements. Candidates with an MBA or equivalent degree or CFA are preferred.
Interested candidates can apply via Prudential's website.
In May Prudential Capital, which is the Chicago-headquartered private placement investment arm of Prudential Financial, emerged as the backer of an attempt to restructure Fenway Partners' 1998- and 2006-vintage funds. That deal fell apart in June after investors were unhappy with pricing, as Secondaries Investor reported.
Prudential’s alternative assets group manages more than $9 billion in assets, comprising private equity and hedge funds, as well as real estate and real assets, according to its website. Prudential Financial has more than $1 trillion in assets under management.
HarbourVest Partners' London-listed investment vehicle will tone down its secondaries investments amid rising valuations.
HarbourVest Global Private Equity (HVPE)'s exposure to the strategy stands at about 30 percent, which is above its 25 percent target, director Richard Hickman said at an event presenting the findings of a survey of 30 HarbourVest managing directors.
"We'll still commit to secondaries but perhaps in a more moderated way," Hickman said. "In terms of HVPE you'll have consistent exposure but not an increase over the next few years."
The firm is also focusing on niche UK managers amid uncertainty around sectors such as consumer spending and retail. HVPE has about 3.5 percent of its portfolio exposed to UK assets, according to managing director Peter Wilson.
"It doesn't mean we're moving away from the UK," Wilson said. "There are a number of managers we think have skills around specific niches or specific internationalisation for existing UK companies, or they may be relatively small players in a market but have an opportunity to consolidate. That still will be attractive for us."
HarbourVest will pay less attention to GPs who focus on areas such as consumer and retail-based businesses given increasing uncertainty around those sectors, Wilson added.
"You can't ignore what we all are going through, but you adapt the strategies to identify those managers who are best able to cope with the environment."
The Boston-headquartered firm, which opened its London office in 1990, outlined three global "megatrends" for the next decade. They were: technological leaps forward, demographic shifts and an increasing role played by China, especially in venture capital.
In Europe the survey also identified consolidation as an investment opportunity.
HarbourVest may make acquisitions to allow it to expand into other asset classes, Wilson said. Last year the firm had acquired BAML's capital access funds team which focuses on emerging and diverse managers, which it renamed HarbourVest Horizon.
"You might well see us in terms of expansion of other parts of private equity or private markets businesses like in real assets and in private credit," he said. "We're intent on following our own strategy and building skills where necessary via acquisition; we're not looking to be acquirers for the sake of acquiring."
GP-led fund restructurings can test loyalties between limited partners and their fund managers, according to Aberdeen Asset Management.
While GPs know how to best manage assets in a fund, LPs in restructuring processes can end up not being properly served, Mirja Lehmler-Brown, senior investment manager at Aberdeen Asset Management, told delegates at Private Equity International's Women in Private Equity Forum on 21 November.
“[The GP will] know exactly what to do around some value creation aspects, but it's not necessarily great if you're an LP that sits in the structure and think 'I was there for you 10 years ago’,” Lehmler-Brown said.
“You're recreating a structure where, for all sorts of reasons, some LPs cannot follow the money. So it's creating a bit of conflict as well to see... who should [the GP] look after.”
GP-led transactions fell in both value and as a proportion of the secondaries market during the first half of this year, accounting for less than 15 percent of market volume according to estimates from Greenhill Cogent in July. The decline was attributed in part to GPs shifting from fund restructurings towards a more LP-friendly tender offer-style process, Greenhill noted in its report.
High profile transactions this year include Apax Partners' proposal to run a process on its 2007-vintage flagship buyout fund and Nordic Capital's process on its 2008-vintage fund. Apax's process was cancelled due to insufficient demand from limited partners in the vehicle, as Secondaries Investor reported.
Buyers are increasingly approaching GPs directly to find suitable fund candidates for restructurings, Lehmler-Brown added.
“Secondary funds are trying to be more proactive and not going to the LPs to try and buy stakes,” she said. “Actually working with the GPs is much quicker in order to try and get [the] GP themselves [to] come up with a new solution – a fund that they can target.”
Limited partner appetite for secondaries funds is at an all-time high. More capital was raised for the strategy in the first six months than any other half-year period, with almost $24 billion collected for private equity secondaries vehicles alone as of the end of June, according to PEI data.
By the end of the third quarter, the amount of capital raised for buying stakes in private equity funds hit $26.9 billion, slightly surpassing that raised at the same point last year. It is clear LPs are hungry for secondaries: according to the Perspectives 2018 Survey, almost three-quarters of limited partners globally commit to private equity secondaries funds in some way, either through de ned allocations or opportunistically.
Regional differences are palpable: North American LPs are much more opportunistic when it comes to the strategy, with almost 72 percent responding that they invest opportunistically versus less than half in western Europe.
Source: Private Equity International
“A lot of European LPs have so far not taken the time to think about the place of a secondaries GP in their portfolio,” says Sunaina Sinha, managing partner at London-based placement agent and advisory firm Cebile Capital. “They are weighing [secondaries] against their existing portfolio and saying, I don’t need to change. There’s a lot of, if it ain't broke, don’t fix it.”
Still, more than one quarter of LPs globally do not commit to private equity secondaries funds, according to the survey. This figure isn’t surprising as LPs have a multitude of other alternatives strategies to choose from – buyout, growth, venture – which deliver higher returns, Sinha says. While an attractive way to beat the J-curve by deploying capital faster as well as diversifying a portfolio by vintage and manager, secondaries do not appear de rigueur in an investment portfolio...for now.
A few developments this year signal that LPs are becoming increasingly savvy when it comes to the strategy. In October Singaporean state-owned investor Temasek emerged on the buyside of a portfolio of buyout stakes from British Columbia Investment Management Corporation, and State of Wisconsin Investment Board invested $231 million over the summer in acquiring stakes in eight real estate funds.
While some of these deals are sporadic, other traditional LPs are in for the long haul. In May, Public Sector Pension Investment Board, one of Canada’s largest public pensions, told sister publication Secondaries Investor it was planning on building an in- house secondaries team as early as 2019. Clearly, LPs are starting to see the bene t of being on both sides of secondaries deals.
LPs are also becoming more selective in the type of secondaries strategy they prefer. According to a survey conducted by PEI and Switzerland-based Montana Capital Partners in September, family offices that invest in secondaries are most likely to do so via direct secondaries – acquiring portfolios of direct minority stakes in companies – than any other method.The reason? “Carry and fees – nothing more complicated than that,” says Richard Clarke-Jervoise, head of private equity at Stonehage Fleming.
As the secondaries market races towards a potential record year for both fundraising and deal volume – intermediaries are predicting at more than $42 billion in closed transactions – the year ahead for the market looks promising. Giant firms including Ardian, Lexington Partners and possibly Coller Capital may be eyeing flagship fund launches in the next 12 to 18 months, and niche players focusing on strategies such as preferred equity and GP-led restructurings will no doubt hit the fundraising trail.
The range of opportunities for LPs to access the strategy is more attractive than ever – secondaries firms will do well to strike while the iron is hot.
Look out for more insight into investors' thinking in PEI's Perspectives 2018 special in December.
Credit facilities are not controversial when used for their original purpose: allowing general partners to deploy capital rapidly and efficiently rather than waiting for LPs to respond to capital calls. It is only when these facilities are used for longer periods of time – with a resulting effect on internal rates of return – that they become an issue. “That to me is a massive problem,” said Brady Hyde, former portfolio manager of private equity investments at UPS Group Trust. “We wouldn’t invest with the manager.”
The use of a facility does boost IRR to a certain extent. A model by private equity advisor TorreyCove shows that if a $100 million fund uses 100 percent debt financing for the first two years, and realises $200 million at the end of year six, the credit line offers an IRR boost of 300 basis points and negatively affects MOIC by 0.12 turns, compared with not using any facility. These findings underscore the need for greater transparency, such as reporting net IRR both with and without the credit line.
LPs are divided on the issue. Those that favour IRR as a metric – either for the sake of their own personal compensation or for the sake of comparing private equity with other asset classes – are more in favour than those that focus on multiple of invested capital.
The Institutional Limited Partners Association issued a nine-point guidance on the use of these lines in June, which recommends partnership agreements “delineate reasonable thresholds for their use”, including setting a maximum of 180 days outstanding. However, the organisation is said to be in the process of revising these guidelines after industry feedback, so this could change.
There are tax consequences for tax-exempt LPs. If a fund purchases an asset with a credit line, the income from it may make a tax-exempt investor taxable. However, there are ways for fund managers to mitigate this.
It’s difficult to get a sense of the scale of their use, but Jeff Johnston, chairman of the Fund Finance Association, tells as that “virtually every one” of the firms in the top 100 of the PEI 300 uses a subscription line.
Subscription lines may put a block on attempted transfers of LP interests – something many LPs may not be aware of until they attempt to implement one. As the security for the facility is the LPs’ uncalled capital commitments, some facilities contain covenants that place limitations on LP transfers.
There are some strategies and asset classes for which subscription lines make more sense. For example, Johnston says the longest, deepest penetration has been in the real estate sector. The use of these lines arguably makes the most sense for secondaries funds, as the nature of the strategy means they could get calls from hundreds of different LP interests they own to fund capital commitments at any moment, one banker told us. As those calls can happen on a near-daily basis, a secondaries fund would have to sit on a large cash reserve, which would drag down returns.
The risk of default is “minute”, one LP told sister publication Private Equity International, based on the credit-worthiness of the limited partners, the size of the facility – typically around a fifth of the total fund size – and repayment term, typically a year.
LPs may be tempted to add leverage to their portfolios. If capital that should have been drawn down is left on investor’s balance sheets, “it means we will be underweight [against] our target and have to make a decision as to where we put that money”, according to Prudential Portfolio Management Group’s alternatives head Michael Howard. “If you redeploy it elsewhere then your programme is levered.”
Your latest research says there is ‘no free lunch’ when it comes to secondaries. What does this mean and what did you find?
Secondaries are often seen as providing the best of private markets with shorter time-to-cash-flows. They also give a sense of control to buyers who can see the actual assets in portfolios for sale. Secondaries are therefore reassuring: investors are under the impression that they cannot go wrong as portfolios include assets clearly identified, theoretically diversified, supposedly at a discount, historically exhibiting a high return while requiring a shorter time exposure. This impression is so strong that investors are tempted to ditch primary investments altogether for pure secondaries programmes.
[caption id="attachment_22074" align="alignleft" width="300"] Cyril Demaria[/caption]
This is dangerous. Secondaries provide a false sense of security. In fact, they are an expert’s game. Non-expert buyers should aim at a rationale beyond returns, as market conditions are unfavourable. These extra reasons include getting access to coveted fund managers for future commitments, or chasing opportunities in niches or under the radar. The former can be expensive and the latter requires expertise.
Are the promises for secondaries “too good to be true”?
In finance, risks and returns have a direct connection. In private markets, this relationship is a triptych: risks-returns-liquidity. If you want more of one, the others have to give. Secondaries are supposed to provide buyers with faster cash inflows than with primaries. Logically, returns are lower. In secondaries, investors in effect trade returns for liquidity.
When we write that secondaries are “too good to be true”, we refer to the fallacy of using internal rates of returns (IRRs) to measure their performance. Secondaries return cash fast, and IRRs are highly time sensitive. The measure is rigged from the outset. A fairer measure is cash-on-cash (through distributed-to-paid-in, DPI) on a base 100 if primary-secondary comparisons are involved (to avoid biases associated with credit lines). Primary-secondaries comparisons should also factor total costs and actual drag on performance of unused cash.
You talk about the “myth of education” through secondaries. Are buyers deluding themselves when it comes to due diligence?
Buyers might be optimistic or naive. It is a well-known cognitive bias to give more weight to what we see and what we know, than what we can’t and don’t. Buyers assume that as they can look at assets for sale on the secondaries market, the game is easier and they can learn a lot in a short time frame. This is not true.
Asymmetries of information are structurally higher in secondaries than in primaries, due to differences in time constraints (a few weeks in the first case versus months in the second) and in terms of quantity and quality of information (a few quarterly reports versus a full due diligence). In fact, secondaries discounts exist to compensate this information asymmetry and that time pressure. In that context, thinking that investors can learn private markets investing through secondaries is akin to learning how to surf by just watching the waves.
Have the benefits of mitigating the J-curve been oversold to LPs?
Yes and no. Secondaries fit a specific role: they are a tactical instrument completing strategic allocations through private markets primaries. They can be useful, but should be used discerningly. In an ideal world, opportunities would show up exactly as investors want them.
This rarely happens. When it does, market conditions are usually difficult and investors tempted to wait and see. With hindsight, starting a private markets programme in 2008 by loading up on secondaries of quality with deep discounts while simultaneously launching a long-term primary programme was a great idea. Doing it was rather difficult.
The complaint of the “pain of the J-curve” is also overplayed. In a programme of primaries, the J-curve happens only once: at inception. As serious investors deploy capital regularly, their programme at cruise pace recycles distributions to fuel further commitments, while creaming off performance. In that context, are secondaries necessary? On the contrary, a theoretical programme consisting purely in secondaries imply a series of steep but systematic “J-curves”.
Cyril Demaria focuses on illiquid assets and is based in Wellershoff's Zurich office. His prior experience includes founding multiple funds and being in charge of private markets research in the chief investment office of UBS.
Do you think that secondaries have been oversold to investors and that they provide a false sense of security? Let us know: email@example.com or @adamtuyenle
First Republic Bank's investment management arm has offloaded a portfolio of tail-end credit fund stakes as part of a clean-up, Secondaries Investor has learned.
Altair Alternative Investment Platform, the private investments unit of the San Francisco-headquartered bank, sold stakes in 13 entities representing six underlying managers, Altair managing director Hezy Shalev told Secondaries Investor.
The process began in July and the size of the portfolio traded was around $25 million, he said. The portfolio comprised two separate funds of funds containing 2008- and 2009-vintage interests originally created by Luminous Capital, a wealth advisory firm that First Republic acquired in 2012.
One buyer acquired both portfolios. Pricing was in the low 80s as a percentage of net asset value based on a 30 June valuation date.
The deal allowed First Republic to tidy up the portfolio without leaving too much upside, Shalev said.
"One of the portfolios was delivering a 19 percent [net] internal rate of return and a 1.8x [net] return. We figured we have three to four more years left on the trade and probably based on our estimation, 0.06x to still earn, probably at the dilution of IRR, so we just figured we'd clean it up," he said.
The other portfolio will deliver an 11 percent net IRR and a 1.45x net return after the sale, compared with a net IRR in the high 11 percent range and perhaps a 1.5x net return had the sale not occurred, according to Shalev.
"The give-up was negligible," he said.
He declined to comment on the identity of the buyer, which advisory firm worked on the sale or the underlying managers.
This was First Republic's first sale on the secondaries market and it may sell again as early as mid-2018, he added.
Private debt and credit funds accounted for 4 percent of secondaries deal volume last year, according to a survey by advisory firm Evercore.
Shalev said the deal priced higher than what the bank had expected it would.
"It shows that the market right now is clearly a seller's market," he said. "We've looked at a few deals to buy over the past couple of years and could not get close to anything. Here we are as sellers and we got a great price."
Limited partner advisory committees are unlikely to become more professional bodies, owing to sensitivities around limited partnership status, according to a panel at the Association of the Luxembourg Fund Industry’s operational efficiency and legal engineering conference on Tuesday.
While some LPACs have become more institutionalised, it is unlikely to emerge as a wider trend, the panel said.
“LPACs will remain ad hoc because LPs are sensitive about their liability and LP status,” said Frédérique Lifrange, a partner at law firm Elvinger Hoss Prussen. “They don’t want to be liabile for management decisions. As lawyers, we see that reflected when drafting fund documentation,” she added.
LPs are also acting to preserve their individual interests and make clear they do not represent the LPs collectively in a fund, he added.
The panel also discussed the impact of the increased number of LPs making co-investments, with the level of conflicts of interest risk rising significantly, said Jerome Wittamer, founding partner at Expon Capital and president of the Luxembourg Private Equity & Venture Capital Association.
“Governance, especially to do with conflicts, is really an issue of potential conflict. Ultimately you can’t avoid them, so you better have a good rule-book on how to address them,” said Wittamer.
LPACs play a considerable role in fund governance, with 100 percent of LPs requiring them to be in place before considering making an allocation to a fund, according to research by fund services firm Vistra. LPs diverge on how they want managers to govern the fund, Wittamer added.
“Some LPs want the application of every rule, and some are happy to just tick the boxes,” he said.
Idinvest Partners has been focusing on GP-led deals with its third dedicated secondaries fund in the European mid-market where managers' receptiveness to such opportunities is increasing.
[caption id="attachment_2481" align="alignright" width="199"] Christophe Bavière[/caption]
The Paris-headquartered firm's Idinvest Secondary Fund III, which held its final close on €442 million in June, is around 25 percent invested, chief executive and managing partner Christophe Bavière told Secondaries Investor. Around 80 percent of those deals are GP-led restructurings, he added.
"It's the core of what we do now," Bavière said.
In the upper end of the market, large firms such as Apax Partners do not need to be told how they can use secondaries to change their investor base or portfolio, Bavière said, adding the opportunities lay in the European mid-market.
"In the German mid-market, say a player managing a €450 million fund, you can visit him and explain that he can use tools, that his investor base can change, and that he can keep control of the underlying investment and send cash back to investors," Bavière said.
GPs are increasingly receptive to such restructuring proposals, he added.
"For GPs today, you're either in the category of the hottest with a good track record and you fundraise in five seconds. But 90 percent of people are not in the top decile, and they need to restructure their [distributed-to-paid-ins], they need to restructure and change their story."
ISF III beat its €400 million target after a year and a half of fundraising, according to PEI data.
In November the firm hired Charles Daulon du Laurens as global head of investor relations and marketing to help it expand beyond its French home market.
Idinvest has more than €8 billion in assets under management and invests across primaries, secondaries and direct co-investments, as well as venture and growth capital and debt, according to its website.
Timber Bay Partners, a secondaries firm formed by executives from Fort Washington Capital Partners Group, has held the first close on its debut secondaries fund on just under half the target.
The Cincinnati-headquartered firm has raised $95 million of a $200 million target for Timber Bay Fund I, according to a filing with the US Securities and Exchange Commission. The fund launched in November.
No placement agents are listed as working on the fund, the filing shows.
Timber Bay focuses on private equity general partners which have liquidity issues, according to its website. The firm was founded in 2016 by Fort Washington's former head of secondaries Joe Woods and his former colleague Phil Johnson. Its other employee is Chris Mehlhorn, a vice-president who spent four years at Fort Washington.
Private equity secondaries funds had raised a combined $26.9 billion as of the end of the third quarter, slightly above the $25.1 billion raised by the end of September last year, according to PEI data.
Timber Bay did not return a request for comment.
The sceptics may believe the fund of funds model has gone out of fashion with institutional investors, but AlpInvest Partners believes it delivers something many LPs still want: expertise and access.
The Amsterdam-headquartered firm’s evolution has been swift: in the six years since it was acquired by The Carlyle Group its number of LPs has rocketed to 173 from just two; it has a 12-strong sales and investor relations team in addition to 36 at Carlyle and it has added 30 professionals to its team.
Add to that the $6.5 billion it collected for its secondaries programme in April – a 27 percent jump from its previous haul – and it’s clear AlpInvest is doing something to attract investors to its model.
And yet, it hasn’t been an easy path, according to Wouter Moerel, the firm’s head of secondaries.
[caption id="attachment_20264" align="alignleft" width="215"] Wouter Moerel[/caption]
"One of the biggest challenges was getting the AlpInvest brand known in the LP market," Moerel tells Secondaries Investor. "People just didn't know us. We spent the first three to four years knocking on doors and explaining who AlpInvest is."
The AlpInvest of 2017 looks very different to that of 2011, and not just because its investor base has evolved. The firm has also been busy putting the finishing touches on its internal personnel structure and is embarking upon new strategies.
AlpInvest now comprises four business lines. In addition to secondaries, its primary team is led by Ruulke Bagijn, who rejoined the firm in August after stints at AXA Investment Managers and Dutch pension manager PGGM, one of AlpInvest’s two long-standing clients along with APG. Co-investments are led by Rob de Jong, a 16-year veteran of the firm.
The final piece of the puzzle is its partnership fund, the business that takes stakes in private equity GP management companies.
The strategy is being led by Sean Gallary, who co-founded Tunbridge Partners, an investment firm which acquires stakes in real assets-focused alternative managers and joined AlpInvest in February. It is understood the firm is seeking around $1.5 billion for this strategy.
Moerel declines to comment on the partnership fund.
This “generational change” has resulted in some personnel leaving the firm due to diverging views on what they wanted to do in the future, leading to reports about churn at the firm, according to Moerel. Such changes were intentional, he insists.
“Every step has been planned, but it took us six years to get there.”
A HOT MARKET
AlpInvest’s place in the market is perhaps not so unusual for a fund of funds wanting to adapt to a world where institutional investors still want access to top quality GPs but want to reduce the amount of fees they pay. As with firms such as Ardian and Hamilton Lane, AlpInvest is aggressively pursuing separately managed accounts. Mandates comprise almost all of its $25.5 billion in primary AUM and accounted for just under half of the capital in its latest secondaries fund. Out of its 173 clients, 23 invest through SMAs, something Moerel says will only grow.
Primaries remain an important part of this, accounting for between 60 percent to 70 percent on average of a typical SMA, with secondaries and co-investments making up the remainder. AlpInvest raised $652 million for primaries last year, and its aim is to raise and deploy as much as $1.5 billion per year.
The firm is also eyeing different sources of capital, such as the retail and high-net-worth individual market, something Bagijn and the primary team will spearhead. While the firm is still at the drawing board, thinking about the exact form a product in this market will take, it will likely be a fund of funds product that mainly comprises primary investments with a “good proportion” of secondaries and co-investments over time, Moerel says.
“We’re trying to figure out right now what is possible there and what structure is economical and viable,” he says.
As for the secondaries market, which is experiencing record fundraising levels and is predicted to deliver more than $42 billion in deal volume this year, Moerel is upbeat.
“Just as Robin Williams in Good Morning, Vietnam says, it’s hot. Damn hot!” he jokes. NAVs of portfolios have risen significantly thanks to buoyant public markets and pricing is at an all-time high – average high bids for buyout stakes hit 98 percent of NAV in the first half of the year, according to a July report by Greenhill Cogent. So what is AlpInvest’s strategy amid such challenging market dynamics?
“We think everything has the opportunity to stay flat or go down,” Moerel says. In the LP positions market, the firm is very selective, acquiring single interests or highly concentrated positions where competitors are less able to use leverage because banks do not want to lend against less diversified portfolios. AlpInvest is also focusing on Asia where valuations are more attractive, according to Moerel, or the energy sector where the firm believes it is “the only game in town” due to its ability to leverage Carlyle’s sector knowledge.
As for GP-led deals – a market that has garnered much attention this year amid brand name managers such as BC Partners, EQT, Apax Partners and Nordic Capital using secondaries for stapled deals or potential restructuring processes – AlpInvest is optimistic. Its ASP VI secondaries programme has committed to 12 investments since it began deployment in September last year, more than half of which were in GP-led deals.
One of these was the restructuring of Southern Europe-focused buyout firm Investindustrial’s 2008-vintage fund, an €865 million deal in which AlpInvest became the majority LP in a new vehicle into which six assets from the €1 billion fund were moved.
AlpInvest likes this part of the market, Moerel says. “Here we’ve been able to buy on average 8x EBITDA. We reset the carry, we get great alignment. If something goes wrong we can have a dialogue. We’ve done a lot of that.”
As the firm positions itself for the next stage in its evolution, how does it feel about its own LPs becoming more independent through in-housing private markets capabilities and potentially becoming competitors to AlpInvest themselves? Moerel is sanguine. The firm retains its clients for a long time and continues to invest on their behalf in various subsegments of the primary market where they find access difficult, such as the lower- and mid-market where there are high returns and acceptable risks, he says.
The firm can help its clients transition from a fully outsourced programme to insourcing part of their programme. AlpInvest invested solely on behalf of Dutch managers APG and PGGM between 2001 and 2011 and helped them do just that.
“We continue to have long relationships with [our clients],” he stresses. “We're not going to hire a team for you, and you can't hire our team. But we will help you with developing your investment business.”
The US Securities and Exchange Commission will boost its focus on transparency around fees and expenses going into 2018 as the agency takes a step back from rulemaking, its chairman Jay Clayton has said.
The change in approach is part of a “commitment to increase transparency and accountability”, Clayton told delegates at the PLI 49th Annual Institute on Securities Regulation, according to a statement on the SEC’s website.
The speech was published along with the agency’s Division of Enforcement Annual Report for the 2017 fiscal year, which reasserted the SEC’s commitment to tackling fees and expenses transparency.
The report does not break down the enforcement actions by asset class, but does show that the total number filed in fiscal year 2017 fell 13 percent to 754 compared with a year earlier. This was attributed to the conclusion of a voluntary self-reporting program affecting the sellers of municipal bonds.
That the SEC will focus further on fees and expenses is unlikely to be a surprise to private fund managers. Around 80 percent of the issues raised by SEC examiners when visiting a firm relate to this issue, according to one lawyer.
One of the most recent actions taken was against Platinum Equity Advisors, which was fined $3.4 million in September, for allegedly charging three of its private equity fund clients broken-deal expenses that should have been paid by co-investors.
One case against a private equity firm appears in the annual report’s list of noteworthy actions. It related to Shaohua (Michael) Yin, a partner at Hong Kong-based Summitview Capital Management, who allegedly amassed more than $29 million in illegal profits by insider trading in advance of the April 2016 acquisition of DreamWorks Animation SKG Inc. by Comcast Corp.
ACE & Company, a Geneva-headquartered private equity firm, is expecting a first and final close on its fourth secondaries fund by the end of the year, Secondaries Investor has learned.
ACE Secondary Investments IV, which launched in mid-November, has a $20 million hard-cap, according to co-founder and managing director Sherif ElHalwagy. ACE will accept no more than 20 limited partners and expects the fund to be oversubscribed among its solely private client investor base.
“We operate in an area of the market which we feel is generally under-served, which is to provide liquidity to sellers of fund interests of small to medium sizes at any point beyond six to seven years of the fund’s life,” ElHalwagy said. “We seek opportunities in a variety of geographies, in both the developed and developing world where we feel that there will likely be few competitors sitting at the table.”
The fund will target positions in buyout funds and is not restricted by geographic mandates. ACE charges a 2 percent management fee and 20 percent carried interest on capital called for its secondaries vehicles.
ACE raised $15 million for each of its two previous secondaries funds which launched in 2013 and 2015 respectively. The firm has also raised three buyout co-investment vehicles since inception and manages around $604 million in total assets, according to PEI data.
How was this fundraising process different for SL Capital than the previous two?
Our first two funds, SOF I and SOF II, were raised in pretty quick succession and then we were effectively investing them in parallel. This one was more standard in the sense that we had got nearly all of the prior funds invested by the time SOF III was raised.
Having said that, we had some investors who were keen to start conversations last year. We had a first close in October 2016 that was driven by those investors, which was helpful because it meant we had a degree of visibility on the capital-raising process. This year we focused more on attracting new investors. In the end it was around 60 percent existing investors and 40 percent new.
How has your LP base changed?
The vast majority of the money comes from pension funds, from local government schemes in the UK to state and corporate pension plans in North America. There were quite a few investors that came in through multi-family offices – their clients seemed to like the opportunistic nature of the strategy. We've made two investments so far out of the new fund – just under 10 percent has been invested in the last six weeks.
What sort of opportunities are you seeing?
The strategy here is to focus on niche areas of the secondaries market and dealflow can come and go depending on the time of year and short-term market cycles. But since the summer there has been a huge pick-up in dealflow generally across the secondaries market and in our space too.
With the headlines around larger deals and the prices people are able to achieve – not just for mainstream private equity assets but a broader range of illiquid funds – it encourages sellers to come to market.
At our end of the market there’s a trickle-down effect and there are plenty of opportunities to look at right now. We are able to be quite selective about what we dig into and what we drop early on.
In this high-price environment, do you find you have to carefully manage investor expectations?
Yes, certainly in terms of deployment pace, less so in relation to returns. Secondaries is an opportunistic strategy. You can’t just say "we are going to go out and buy these three or four buyout funds over the next six months". We find we go through mini cycles in deploying capital. For example, the first half of this year was pretty tough – we didn’t do much at all. But there have been other times when we have tonnes of stuff on and you get three or four deals done at once, as we have done this autumn. There’s definitely an element of managing expectations, but it’s always been a slightly lumpy market.
At the large end, anecdotally, people are settling for slightly lower returns on the diversified portfolios they are buying but are compensating with leverage. At the moment we don’t feel as though we have to follow those trends very aggressively in our part of the market.
Has the August merger with Aberdeen changed anything for you?
We’re all in a new office together, which is great. Rather than being in the ground floor of an old office building I’m on the fourth floor of a nice new one! Nothing has changed in terms of our secondaries team or approach. We just see the merger as additive. Our new colleagues have complementary secondaries expertise and relationships. Overall, a bigger, broader platform and more resources to work with are real plus points.
Patrick Knechtli is a partner and head of secondaries at SL Capital Partners. He joined the firm in 2009 and also participates in primary fund investments and co-investments. He previously spent eight years at Coller Capital in London and has experience at Baring Brothers and ABN Amro Corporate Finance.
A number of large US public limited partners have pushed towards consolidating their GP relationships over the last few years, hoping to reduce fees and complexity and to increase returns.
New Mexico State Investment Council, which has 9.3 percent of its $22 billion assets under management in private equity, started around 2013. Teacher Retirement System of Texas, which has 12.3 percent of its $146 billion AUM in private equity, also jumped on the bandwagon. The list also included pensions in New Jersey and New York.
Large alternative asset managers rejoiced at the prospect of bigger chunks of money being directed to their funds. Apollo Global Management and KKR each received a $3 billion separately managed account with Texas Teachers to be invested across private equity, real estate and energy among other strategies. And with consolidation came large portfolio sales, which secondaries buyers welcomed.
The poster child for that trend has been California Public Employees’ Retirement System, which generated at least $884 million in proceeds from sales of private markets stakes last year, representing at least 72 funds across 40 managers.
As the largest US public pension plan in terms of assets – it has $339 billion, including $25.9 billion in private equity – it carries a lot of weight in the private equity world, and when it announced in 2011 that it would begin a five-year strategic plan to cut its number of direct relationships to 30 quality firms, GPs listened carefully.
The results have been mixed.
While concentrating more money into fewer managers has worked to boost performance at Texas Teachers – its annualised 10-year private equity return topped the American Investment Council’s latest ranking of pension funds by private equity returns at 15.4 percent a year ago – CalPERS hasn’t been so successful. This year, it missed its benchmark, with its PE portfolio returning a 9.3 percent 10-year net internal rate of return for the period ended 30 June. Complexity and monitoring intensity haven’t diminished and CalPERS hasn’t benefited from significant fee reductions.
Its board and its new private equity consultant Meketa Investment Group are now rethinking the 'core 30' concept, according to CalPERS’ annual review meeting on Monday.
The pension is “not seeing the kind of partnership opportunities” it had envisaged, Steven Hartt, a principal with Meketa, told CalPERS’ board members during the meeting.
“There can be groups like Blackstone or Carlyle that look to do partnership activities across a number of asset classes as opposed to just private equity and working with CalPERS to do those kinds of activities across multiple asset classes can be a little complex.”
Meketa and CalPERS’ investment staff plan to study the possibility of refining its core 30 and it remains to be seen whether it will move deeper into separate accounts and co-investment activity (on the latter, Hartt pointed out a need build up on-staff experience to be able to do so effectively).
This is not a sign, by any means, that the trend for concentration of private equity portfolios has failed. Rather, it’s a realisation that CalPERS’ approach has not let it fully milk these fewer but deeper relationships. Secondaries buyers should expect further dealflow as other big US public pensions continue their consolidation plans.
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Credit Suisse's former global head of secondaries advisory has emerged at Jefferies fund placement group spin-out M2O Private Fund Advisors, Secondaries Investor has learned.
[caption id="attachment_18287" align="alignleft" width="150"] Mike Custar[/caption]
Mike Custar, who left the investment bank's secondaries unit in January, has joined the White Plains, New York-based boutique placement agent, according to two sources familiar with the matter.
It is unclear whether Custar will focus on fundraising or secondaries.
M2O, which stands for "Made to Order", provides tailored advisory and capital raising services to private investment managers, according to its website. Formed by three executives who spun out from Jefferies' fund placement group in 2012, the firm's team members have raised more than $20 billion over the past decade across more than 40 general partners.
Funds that M2O has helped place include Parthenon Capital Partners V, MVM Life Sciences Partners' 2013-vintage fund and Comvest Investment Partners V, according to its website.
Custar, who spent 13 years at Credit Suisse's private fund group, stepped down in January to pursue personal interests, according to an internal bank memo seen by Secondaries Investor.
He was succeeded by Mark McDonald, who took over as the bank's global head of secondaries advisory in February. McDonald is moving back to the buyside and will be joining Deutsche Bank Asset Management later this month to rebuild its secondaries business after the investment bank's team spun out in August.
M2O declined to comment. Custar did not return a request for comment.