Structured Transactions: Keeping the upside

A perennial problem for the secondary seller – especially the opportunistic sellers in today’s market – is the ‘what if’ question. Yes, it’s nice to bank the cash while markets are hot. But if they’d held onto their assets a little longer, would they have seen a bigger upside?

One way for potential sellers to avoid this conundrum is to do a structured transaction, which allows them to raise capital without the need to sell (or raise debt against) their asset.

Pierre-Antoine de Selancy, managing partner of 17Capital, describes his own firm’s offering as “preferred capital”. The idea is that a GP looking for additional capital (maybe a fully-called fund, for example), or an LP trying to accelerate liquidity or manage its portfolio would effectively sell 17Capital a tranche of preferred equity. When the distributions start coming back, 17 gets its money back plus a return, and the GP or LP keeps the rest.

“It allows private equity investors to raise additional capital or generate liquidity whilst preserving ownership of their portfolios and future upside,” explains de Selancy. “If an investor truly believes in the quality of its portfolio, [our] investments are an attractive alternative to a secondary sale.”
The concept also provides an alternative for firms that might otherwise look to raise debt against their portfolio. “Although it’s more costly than debt financing, it is also much more flexible, [since] an investor isn’t tied to specific terms, covenants or repayment dates,” he says.

According to de Selancy, the nature of the client demand has changed. “In 2009, most situations were distressed; people had a problem that needed solving. Today most of those problems have been solved; today it’s more about raising capital opportunistically to make further portfolio investments.”

For LPs who have been sitting on good portfolios since the crisis, and have had to endure dismal J-curves as a result, choosing to cash in at this point in the cycle (i.e. just as markets are recovering) would be a mistake, he argues. “Investors who believe in their portfolio shouldn’t sell it now – they would give away all the future upside.”

Nonetheless, the concept remains quite alien to many institutions in Europe, he admits. “Two-thirds of the transactions [we’ve done] have been with people who have never considered selling.” This may be a GP who faces debt financing constraints from the bank, he says. Or it might be a listed vehicle that wants to accelerate the liquidity of its old funds so it can commit to new funds.

For the time being, that means the firm needs to do a lot of advocacy work, seeking out investors to explain the idea and tailoring a deal to their needs. “We tell [people]: ‘We’d like to invest; we believe our capital would make sense for you’. In a sense, it is like going back to the secondaries market in the 1990s, before the intermediaries arrived.”

But times are changing, he believes. “[Our] expertise and comfort with portfolio holders has increased substantially over the years. [We’ve] completed seven transactions in the last 12 months. [And] the more deals we do, the more we assure investors of our strategy. I think we’re going to see lot of creativity in the private equity market, [since] there’s a substantial amount of capital to deploy – and that will mean more structured transactions.”