What QIC looks for in continuation fund deals

Stephen Whatmore, head of global private capital at the $69bn Australian investor, discloses how it decides whether to roll or sell in GP-led processes.

Participating at an earlier stage in the company life cycle can leave investors concerned that there is still room for growth when the asset graduates from their portfolio, and GPs are increasingly turning to the secondaries market in these situations to extend their exposure by moving the asset – or assets – into a continuation vehicle and giving LPs the option either to roll over or sell out.

Affiliate title Private Equity International recently spoke to Stephen Whatmore, head of global private capital at Australia’s QIC, who outlined the A$92.4 billion ($64.8 billion; €61.4 billion) investor’s checklist for rolling over into a continuation fund. These are: whether the business has the potential to grow from a $1 billion valuation to multibillion; whether it has capacity for geographical expansion regionally or internationally; and whether the management team is skilled enough to expand the capture of its current product set or service offerings.

“There is a category of private equity-owned business that can continue to build value,” Whatmore says. “I think a lot of those investments are going to prove successful and the ‘second bite of the cherry’ investors will be well served. We’re interested in those opportunities ourselves because we do see really good companies leave our portfolio, we think a bit too soon. We’ll have made good money out of them, but it’d be nice to hold them for longer.”

At least one-third of the top 50 GPs in the PEI 300 ranking of biggest industry fundraisers had used continuation vehicles as of December, according to estimates by PEI and Secondaries Investor. GP-led secondaries deal volume hit $63 billion globally in 2021, per Lazard’s Sponsor-led Secondary Market Report, up from $30 billion in 2020. Single-asset processes emerged as the most popular type of GP-led deal last year, accounting for 52 percent of sponsor-led deals.

“We have been a bit more of a seller [and] that’s been partly through scarcity of capital, but we have a number of conversations going, in and around our portfolio, at the moment in terms of continuation and opportunities that we likely will be a buyer into,” Whatmore adds. “It really depends on the company, the pricing, the transactional dynamic, but it’s an opportunity set that is very interesting and we’re looking at very actively.”

QIC was founded in 1991 to manage the Queensland Defined Benefit Pension Plan. It oversees a range of government, domestic and global institutional investors, according to its most recent annual report. The global private capital programme, which began in 2005, accounted for A$7.3 billion, or almost 8 percent.

“All that needs to pencil out to a return expectation that is very comparable to our underlying… cost of capital,” Whatmore adds. “We had one [recently] with a manager that had received very full pricing for a company that [it] wanted to build a continuation vehicle around. We looked at that company and we thought: that’s fair value. We didn’t share the manager’s optimism around the future prospects for the business, and we were happy to not roll into that new vehicle.”

– Read the full interview on Private Equity International.