How Wellcome Trust views GPs holding assets for longer

The $46bn medical research endowment wants to be aligned with GPs who roll over and compound their exposure to assets rather than those who sell down, Robert Coke, head of buyout and residential property, tells PEI.

The private equity market is undergoing a fundamental change to the way it buys and sells companies, with the advent of secondaries technology, follow-on funds and longer hold vehicles.

Firms including Insight Partners and TA Associates are raising, or have raised, so-called double-down funds, which allow them to acquire stakes in assets they already own. For the UK’s Wellcome Trust, a £36.3 billion ($45.9 billion; €42.6 billion) health research endowment, GPs holding on to prized assets for longer – particularly in the face of a potential economic downturn, high pricing and a scarcity of assets – this is a trend to be supported.

“It’s often the case where GPs see what price they’ve been paid and they think, hang on, I’d buy it at that price – particularly in a high-priced environment when there’s a lack of alternatives around,” Robert Coke, head of buyout and residential property at the London-based endowment, told Private Equity International. “To pay a high price for a company you don’t know means – by definition – there’s a lot of risk. Paying a high price for a company you know pretty well is a lower risk.”

Wellcome invested in a recent transaction with hallmarks of a mid-life co-investment deal. It took over the direct equity position in a company held in one of its private equity manager’s funds, in which Wellcome is an LP, thus increasing its exposure to the asset. The GP wanted to recapitalise the asset, and a partner with a stake in the company wanted to sell out, so the manager tried to find LPs to purchase the other partner’s position, Coke said.

In the transaction, another capital provider acquired a stake in the asset – something that was “definitely helpful” in helping the Trust get comfortable with the valuation, Coke added.

While this transaction in particular did not involve a continuation fund per se, the Wellcome Trust is supportive of those processes, he added. The continuation fund market was worth around $57 billion last year, according to research by Jefferies.

“We want to be aligned with those [GPs] that want to roll over and compound rather than selling down, because we want a partner who’s minding the shop for us,” he said. “We’re much more likely to buy [into transactions] towards the tail-end of a fund life where good assets are put into a [special purpose vehicle] to keep compounding, and it allows some LPs to exit. That’s where we would consider coming in [as a buyer].”

Private equity was the best performing part of the Wellcome Trust’s portfolio in its last financial year, delivering a 72.6 percent overall return as of 30 September, according to its latest annual report. The asset class accounted for £13.4 billion, or 32 percent of its total portfolio, reaching a record high by exposure for the endowment.

Wellcome said in January it plans to raise its charitable spending to £16 billion over the next 10 years to fund scientific research.

GP-led secondaries processes, including continuation funds, have landed in the spotlight this year, with the US Securities and Exchange Commission making sweeping proposals in February for how such transactions should be run. These include a one-business-day deadline for fund sponsors to report to the regulator about the close of a GP-led transaction and mandatory third-party fairness opinions.

Some LPs have publicly welcomed the proposals, while the Institutional Limited Partners Association has said that proposed rules will “help to further strengthen” the private funds market.

For the Wellcome Trust, processes that allow managers to extend hold periods on prized assets is something it wants to continue to be a part of, according to Coke.

“Wellcome aims to partner with the best investors globally, whatever their asset class,” he said. “Given we are partnered with good people, we want to do more with them, particularly when they exploit our ability to be long-term investors.”