Secondary buyers find themselves making more complex deals with sellers as they compete for private equity assets. Sellers are increasingly demanding that secondary buyers be (or become) primary limited partners in their funds. Playing this dual role of both secondary buyer and primary limited partner, Goldman Sachs (NYSE: GS) announced a deal with French financial services group Societe Generale valued at 400 million euros (or $490 million).
The deal will see the Goldman Sachs vintage funds acquire SG Capital Europe Fund I and SG Capital Europe Fund II from the Paris-based firm for 220 million euros ($270 million). The management team from SG Capital Europe will continue to manage the funds as general partners, with Goldman Sachs serving as a limited partner.
Goldman has also pledged to invest 180 million euros ($220 million) in a new fund that will be managed by SG Capital Europe.
For SG Capital Europe, the move helps secure funding for the future and a limited partner. Goldman Sachs has not retreated from private equity like many of its investment banking competitors. For Goldman Sachs, the move gives it better access to European middle market companies.
Goldman Sachs is raising a secondary fund of more than $1 billion. The upcoming fund would follow its last secondary fund, Goldman Sachs Vintage II, which closed in 2001 with $1.1 billion. The firm also raised GS Vintage II Offshore in 2001 with $385 million.
Last year, Goldman Sachs’ secondary team expected to be finished with its current investment program by the end of the year. The New York-based firm’s secondary group raised its first fund in 1998 and typically purchases buyout interests from large institutional investors. Earlier this year, Goldman Sachs’ GS Vintage Funds acted as a lead investor in Vision Capital’s acquisition of the entire investment portfolio of CS Structured Credit Fund.
LGT Closes New Euro Fund
Swiss private equity firm LGT Capital Partners has closed its Crown Private Equity European Buyout Opportunities Fund, a $472 million fund-of-funds that will dedicate as much as 25% of its capital to secondary buyout transactions.
The Pfffikon, Switzerland-based firm said that the fund closed at the end of June with investment from limited partners spanning 14 different countries, including the United States. Most of its LPs are European pension funds and large insurance companies. The London Pensions Fund Authority committed $42 million to the fund, it announced late last year. Other LPs reported to be in the fund are Swedish government pension fund AP7 and London Borough of Hillingdon Council.
Tycho Sneyers, LGT Capital’s spokesman, says the firm initially sought to raise between 300 million and 400 million euros ($365 million and $486 million) in two separate funds. The firm was considering two funds, because it thought that U.S.-based LPs would insist on a separate fund structure for their investments. As it happened, he says, the American LPs, mostly foundations, were happy to invest in the European fund, which is structured as an Irish PLC.
“There is big demand for European private equity currently,” Sneyers says. “A lot of the American money is also focusing on European private equity together with increasing allocations of European institutional investors.” He says that the increasing demand will only make things more challenging for funds-of-funds like his, as funds will become oversubscribed at an early stage and become harder to access.
The fund is focused on small and mid-market European buyout funds. So far it has committed more than $120 million to 10 investments. Three of those investments have been secondary deals. Sneyers says that secondary buyers are seeing more distressed sellers than they were 18 months ago.
LGT Capital Partners has more than $5 billion under management in private equity and hedge funds, with approximately $3 billion dedicated to private equity.
Coller Says Ja To Dresdner
If you went to a garage sale where many of the items were only sold in bundles and required complex legal and financial agreements to buy, you might get a sense of what the secondary private equity market looks like. You’d also be at a pretty expensive garage sale. The latest illustration of the state of the secondary market came in September as Coller Capital and Dresdner Bank announced a $90 million secondary deal.
The 22-company private equity portfolio comes from Dresdner Bank’s Institutional Restructuring Unit (IRU), an entity the German bank established last year to reduce its “non-strategic loan and private equity exposures.”
The group had reduced those assets from 35.5 billion euros ($44 billion) to 13.5 billion euros ($17 billion) as of the end of June. Most of the companies in the portfolio are based in North America. Approximately 50% of Coller Capital’s secondary deals are for North American assets.
The deal is a management spinout. Two Dresdner investment professionals will continue to manage the assets independently as general partners, with Coller Capital serving as a limited partner. The deal will likely have a final close by the end of the year.
The management spinout is Coller Capital’s eighth such recent transaction and Dresdner’s first. Coller’s 2001 deal for Lucent Technolgies’ New Ventures Group was similar, with New Ventures Partners spinning out to manage the portfolio independently.
Dresdner bundled the assets, not allowing secondary buyers to cherry-pick specific companies. A spokesperson for the bank would not disclose the names of the companies in the portfolio, but they are mostly based in the United States and span a broad range of sectors including business services, health care and telecommunications.
Spinout deals like this one and another one announced last week between Goldman Sachs and Societe Generale are becoming more commonplace as sellers demand higher valuations for assets being sold to competing secondary buyers.
“The whole secondary market is becoming more complex,” says Tim Jones, an investment director with Coller Capital. “There’s a whole lot more structure going on in the secondary market as buyers and sellers meet in the middle on valuation. Sellers are becoming more complex and trying to get more value. Investment banks are becoming smarter at how to put together structures.”
Coller Capital is investing from its $2.6 billion Coller International Partners IV, which has now invested more than half its capital. Earlier this year the firm struck a deal with financial advisor Abbey National that allowed Abbey to get rid of almost all of its private equity holdings. Abbey’s commitments in the portfolio totaled approximately $1.33 billion. Coller Capital paid between $554 million and $646 million for the assets.
Morning Street Wakes Up Direct Secondaries
While many secondary firms avoid direct portfolio company holdings, a few are increasing the profile of such deals. The latest secondary player to claim the niche is Morning Street Partners, a New York-based firm that is seeking to raise a fund between $100 million and $200 million to focus on the direct buyout and venture capital secondary market.
Morning Street was started by the founding principals of Columbia Strategy, a secondary advisory firm that spun out Morning Street. Morning Street has been actively sourcing deals concurrent with its fund-raising, according to a source familiar with the firm. The firm is placing an emphasis on the operational management of its assets.
Morning Street started fund-raising in the second quarter and expects to have its fund closed by the first half of 2005. It plans to buy primarily U.S. assets from private equity GPs as well as portfolios sold by corporate investors, banks, pensions and endowments. It plans to partner with larger secondary buyers and other investors if it approaches larger deals.
Morning Street is similar to W Capital Partners in its preference for direct secondaries. W Capital Partners closed on a $250 million fund in the spring. However, unlike W Capital Partners, which favors venture, Morning Street will have a more even balance between buyout and venture assets.
Secondary buyers generally tend to view direct portfolios, particularly direct venture portfolios, as unwise investments featuring overvalued assets that are more difficult to price and problematic to manage. The larger secondary buyers that have dominated the market have preferred buyout assets, as buyout deals consume more capital quickly, are generally easier to price and are considered more stable.
Secondary buyers agree though, that venture assets are looking much better now than in recent years. Recently, San Francisco-based Saints Capital bought a significant portion of the venture capital portfolio of Tenet Healthcare.
Earlier this year, Credit Suisse First Boston (CSFB) said it plans to raise CSFB Strategic Partners III, a group of three secondary funds totaling $1.85 billion. The effort will include a secondary fund focused on venture assets that it hopes to close by the end of this year. The target is between $150 million and $200 million.
Partners Caps First Dedicated Fund
Partners Group is not new to the secondaries market. The private equity firm, based in Baar-Zug, Switzerland, had already invested more than $600 million in secondary deals through funds-of-funds by the time it started raising its first dedicated secondary fund 11 months ago.
But Partners Group announced in September that it closed its premier dedicated secondary fund with $607 million. Demand to get into the fund was high, according to the firm. It set out last year to raise between $486 million and $607 million and said it turned away about $365 million in commitments from limited partners. Fund-raising for the vehicle marked the first time the firm aggressively sought U.S.-based limited partners.
LPs in the fund include BP, Canada Pension Plan Investment Board, MetLife and New York Life. Other U.S. investors included insurance companies and state pension funds. The largest segment of the firm’s LP base, about 45%, is from continental Europe. But American LPs account for nearly one-third of the investors in the fund, while the United Kingdom and Scandinavia together account for 10%. The remaining 15% of the fund’s LPs are drawn from other corners of the globe.
Partners Group is focused on European secondary transactions with a prejudice in favor of buyout assets in what it calls “manager secondary” deals. Manager secondary deals are younger funds between two and four years old and with between 40% and 70% of their capital drawn down.
Alfred Gantner, CEO of the Partners Group, says such assets are “just leaving the J-curve” and offer the best prices for more patient investors. “We are not promising our investors quick distributions,” he says, “but we aim at a higher multiple expansion. If you have all the secondary players sitting around the same pot and everyone is trying to get their money out the door, it’s going to be very competitive.”
Gantner notes that the secondary market is flooded with competing capital and is going to be more dependent on the public markets for returns. This departure from traditional secondary deals is why the fund was capped conservatively, he says. Roughly 65% of the fund’s deals will be in manager secondaries, with the remainder being invested in assets from funds between five and seven years old.
A typical investment for the fund would fall between $10 million and $30 million. So far, the firm has invested $130 million, about 30% of the fund, in 15 transactions. Most deals involve buyout assets.
The firm held a first close on the fund last year for $100 million. C.P. Eaton & Associates and HSBC served as placement agents for the fund, with C.P. Eaton acting as a placement agent in the United States and HSBC serving internationally.
UBS Starts Secondary Advisory Practice
Adding to the chorus of those already dispensing advice on the secondary market, Zurich-based investment banking and securities firm UBS plans to open a secondary private equity advisory practice in the United States.
The secondary advisory team will be based in Stamford, Conn., and led by UBS private equity veteran Nigel Dawn, managing director of the firm’s Private Equity Funds Group. Dawn cited UBS’ experience in structuring secondary deals as a strength in its secondary market advisory practice.
Dawn was a chief architect in the firm’s large secondary deal last year with HarbourVest Partners. In that transaction, HarbourVest bought a share of UBS’s private equity portfolio, giving HarbourVest more than 50 LP interests in VC and buyout funds. UBS committed more than $1.3 billion to the portfolio over three years. The secondary sale represented more than half of the UBS private equity portfolio and consisted mostly of buyout funds. As part of the deal, HarbourVest and UBS formed a joint venture, named Tresser, to acquire the partnerships.
The secondary advisory market has become crowded in recent years, with firms such as the Camelot Group, Cogent Partners and Probitas Partners staking claims to secondary expertise.