For a strategy based on diversification, the secondaries market has taken an odd turn. Firms are not just picking up stakes in individual funds but buying individual assets. They are doing this via single-asset restructurings, a deal type that has gone from nowhere to ubiquitous in a year.
Landmark Partners has been an enthusiastic backer of such deals, emerging as lead investor in the restructuring of PAI Partners’ 2005-vintage fund and the 2007-vintage TDR Capital II. In July, HarbourVest Partners backed a process on Lime Rock Partners IV, a 2006-vintage energy fund, which was heavily concentrated around one asset.
Typically, single-asset restructurings are employed in situations where one asset in a portfolio requires extra time or capital to reach maximum value and not all limited partners want to stick around. In other cases, a general partner might have a profitable company that it wants to hold and develop beyond the 12-year life of the fund.
The process on TDR Capital II is a good example. It involved the remaining asset in the €2.2 billion fund being moved into a continuation vehicle managed by TDR and backed by secondaries capital from Landmark and Goldman Sachs Asset Management.
The remaining portfolio company in Fund II is Stonegate Pubs, a British firm that owns pub chains such as Slug and Lettuce. Although the total value was not disclosed, TDR Capital Stonegate, the special purpose vehicle into which the asset was moved, was set up to raise $969 million, according to a filing with the Securities and Exchange Commission.
“The higher price achieved for the company ultimately means a better outcome for the selling fund’s LPs,” says Yaron Zafir, secondaries advisory head at Rede Partners, which is understood to have advised on the deal. ”Therefore, it’s a win-win for both GPs and LPs.”Advocates of single-asset deals see them as beneficial to all sides. GPs get more time and capital to develop the asset and can maintain a stream of fees. Limited partners can cash out for a healthy sum to a secondaries buyer or roll over in hope that the asset will eventually exit for a more impressive valuation. The new vehicle will typically have more LP-friendly terms than traditional two-and-20.
There is, however, no shortage of sceptics. Investors have embraced the secondaries market because it provides early returns, diversified exposure and a low loss ratio. Single-asset deals offer few or none of these things. With a downturn on the horizon, is this a good time for secondaries firms to be picking up chunks of companies that could be about to go through the wringer?
Others believe they reward failure. “For my part, I find [single-asset deals] completely absurd,” says Olav Ostin, managing partner of venture capital directs specialist TempoCap, speaking on a panel at IPEM in January. “If you can’t sell the asset, there’s a problem with it.”
While single-asset deals remain divisive, there’s no suggestion they are going away; Private Equity International is aware of at least two in the pipeline. And with several giant secondaries funds set to close in 2019, the volume and size of these deals will probably only increase.