London-listed SVG said on Thursday that it is in “detailed discussions” with unnamed potential buyers as it seeks to fend off much bigger US rival HarbourVest's £1.015 billion ($1.3 billion; €1.2 billion) unsolicited bid for the private equity investor.
These discussions “may lead to an alternative transaction delivering superior shareholder value” to HarbourVest's 650 pence a share offer, SVG chairman Andrew Sykes said in a statement, adding that the company will update its shareholders by 3 October.
Speculation over an alternative offer to HarbourVest's has intensified since SVG first said it had received approaches from “a number of credible parties” at its interim results on 16 September.
As many as six bidders may have emerged, according to a recent report in the Sunday Telegraph , which cites unnamed sources. The market is certainly hoping for a higher bid: on Thursday, SVG shares rose to a new post-bid high of 681.50 pence, about 4.8 percent above the offer price, but closed lower than that, at 679 pence.
Event-driven hedge fund Polygon, led by veteran M&A investor Reade Griffith, is betting on a higher offer, having increased its long position in SVG via contracts for difference at between 664-665 pence a share, according to regulatory filings.
In response to SVG's defence document on Thursday, HarbourVest reiterated its position that its offer “provides full, compelling and immediate cash value” to shareholders, and noted that there is no certainty a formal offer will be made by another party.
HarbourVest's offer represents a discount of 10.6 percent to SVG's net asset value at 31 July, once a post-reporting period deduction of 8 pence, disclosed by the firm at its interim results, is taken into account. “We urge SVG Capital's shareholders to accept our offer without delay,” HarbourVest managing director David Atterbury said in a statement. The first close for this offer is on 6 October.
As a buyer, HarbourVest can point to some key advantages: SVG's biggest shareholder Coller Capital has already tendered its 26.6 percent to the firm, and several other major shareholders have submitted letters of intent to accept the offer. Including the 8.5 percent of SVG shares HarbourVest bought in the open market, it now has a level of support of about 51.2 percent.
HarbourVest is aiming to acquire SVG Capital using financing from its Dover Street IX Fund, a secondaries fund that raised $4.1 billion of capital commitments for investment, surpassing its target of $3.6 billion.
The firm is an experienced buyer of listed private equity funds, having acquired Absolute Private Equity, formerly a Zurich-listed vehicle, for $806 million in 2011, and the portfolio of private equity fund of funds Conversus Capital, formerly listed in Amsterdam, for $1.4 billion in 2012. Just as important, it has done well with both purchases, generating significant cash realisations and growing its net asset value as a result.
Still, it's clear to see why other suitors might be circling. SVG's portfolio of top-performing private equity managers has posted double digit growth for six consecutive years, but it typically trades at a discount to net asset value in a sector where such discounts “have become entrenched at levels predominately 20 percent plus”, Tom Skinner, an analyst at Fidante, wrote in a research note on 16 September.
The 10 percent drop in the value of sterling against the dollar following the Brexit vote on 23 June has enhanced SVG's value to foreign bidders. What's more, the firm has no debt to speak of, and about £347.4 million in cash on its balance sheet, though as HarbourVest noted in its response on Thursday, that cash represents a cushion for meeting uncalled commitments of £604 million to private equity funds in which SVG is an investor.
But if SVG does manage to secure itself a white knight willing to pay more than HarbourVest's full and final cash offer, who might this suitor be?
Here are six firms that are reportedly in the frame, and also feature in PEI sister title Secondaries Investor 's SI 30 , a ranking of the world's top secondaries fund managers by capital raised over the past five years. (HarbourVest, it should be noted, is ranked sixth, with $10.9 billion raised.)
How likely is it that these firms could emerge with a cash offer? Below, PEI weighs up the possibilities.
Ranked second in the SI 30 for raising $19.9 billion over the past five years, the New York-based firm has plenty of cash on hand. In 2015, the firm held a final close for LCP VIII, the largest global secondaries fund, with $10.1 billion in equity commitments. Lexington also has experience acquiring complex portfolios; it bought a diversified mix of co-investments, fund of funds, and mezzanine assets from Citi for $1.2 billion in 2010.
Blackstone Strategic Partners
The alternative assets giant's secondaries unit is ranked third in the SI 30, having raised $16.2 billion over the past five years. For its latest secondaries vehicle, the vintage-2015 Strategic Partners Fund VII, the firm raised $6.54 billion, exceeding its $5.75 billion target, according to PEI data. The fund's strategy is to focus on purchasing mature portfolios that are fully or near fully invested, and will make opportunistic secondaries investments of between $100,000 for a single stake to about $1 billion for a portfolio purchase, Secondaries Investor reported on 21 March. Since HarbourVest's offer already values SVG at $1.3 billion, its portfolio would seem a rather large purchase for Strat Partners.
Zurich-listed Partners Group, which raised $11.4 billion over the past five years, is ranked fifth. It closed its 2014-vintage Partners Group Secondary 2015 fund on €2.5 billion, PEI data shows. Given the size of this fund, however, it seems unlikely that Partners would want to swallow all of SVG.
Goldman Sachs Asset Management
With some $10 billion raised in the past five years, GSAM is ranked seventh in the SI 30. Its latest dedicated secondaries fund, Vintage VII, is seeking $5 billion. The vintage-2016 fund will focus on acquiring mature private investment portfolios across a wide range of deal types, but can also invest opportunistically, in assets ranging from traditional LP secondaries to more innovative and complex deals, Secondaries Investor reported on 22 June.
Amsterdam-based AlpInvest, now part of buyout giant the Carlyle Group, raised $4.7 billion in the past five years, giving it the number ten spot in the SI 30. The vintage-2015 AlpInvest Secondaries Fund VI has held a first close, raising $1.5 billion of a target $2 billion, according to PEI data. As with Partners Group, given the size of the fund, acquiring SVG would be a mouthful.
DB Private Equity
The London-based private equity arm of Deutsche Bank raised $2.3 billion in the past five years, placing it at number 15 in SI 30's ranking. Its DB Secondary Opportunities Fund III, which invests in global secondaries, closed on $1.7 billion in 2014, Secondaries Investor reported last October, by which time it was already about 40 percent invested.
Given this, and the fact that DB Private Equity's non-traditional secondaries deals typically involve restructurings where the carried interest may need to be reset, transactions with deferred payments, or acquisitions of portfolios of tail-end fund stakes, the firm would not seem to be the most obvious bidder.
So upon closer examination, just two out of the six bidders who have been rumoured in the press appear to be in a position to throw their hat in the ring. However, SVG did say in its defence document that its portfolio appeals to “financial buyers, including secondary funds”. This might suggest its potential bidders include financial institutions without secondaries businesses, which are therefore in the market to acquire one.
All that said, how much could an alternative buyer pay?
“We would be surprised if any cash offer is substantially above the 650 pence HarbourVest offer,” analyst Iain Scouller at Stifel said in a note published on Thursday. “Why would any cash buyer want to pay 700 pence, when 35.1 percent of shareholders have accepted the 650 pence offer, and others were also happy to write letters of intent at the 650 pence level?”
Spokespeople for AlpInvest, Blackstone, and DB Private Equity declined to comment on whether they might be bidders for SVG. No one at GSAM, Lexington, or Partners was available to comment.
-Updated to include HarbourVest's response, analyst comment, and a closing share price for SVG.