www.secondariesinvestor.com

Still climbing

News compendium Contents

News headlines Q&A Welcome

Montana puts PE Ardian: we are not Dear reader, funds up for sale p. 3 in a race to invest p. 9 Benoit Verbrugghe, Managing Partner, Ardian Welcome to our special Secondaries Sacramento launches Investor compendium. secondaries infra FoF p. 3 The ‘fantastic economics’ of Regular visitors to our website will Volcker to be ‘acute’ driver secondaries advisory p. 10 know we offer a unique daily mix of stories, often providing new details and of secondaries dealflow p. 3 Joseph Marks, Managing Director, Capital Dynamics key insights on market developments. We track the institutions, funds and Adrian Millan, Managing Director, Park Hill Group Shackleton acquires transactions shaping the secondaries Todd Miller, Managing Director,Cogent Partners Sigma VC fund assets p. 4 markets within , real Robert Shanfield, Head of Secondaries, estate, infrastructure and private debt. Infrastructure secondaries David Tegeler, Partner, Proskauer We also showcase hand-selected, picking up p. 4 David Wachter, Founding Partner, W Capital third party commentary and research from industry thought leaders on Discounts narrow for US a weekly basis. buyout funds p. 5 Commentary This compendium collates some of the NASDAQ latest to launch most interesting – and most popular – items we’ve published recently, giving secondaries platform p. 6 Secondaries posturing p. 12 you and informative snapshot of today’s Richard Lichter, Chief Executive Officer, secondaries markets. Corporate Partners to Newbury Partners restructure second fund p. 6 We hope you enjoy the collection and Institutional innovation p. 12 encourage you to visit our website Landmark decision for Neil Campbell, Global Head of Alternative for more. Investments, Tullet Prebon’s Louisiana firefighters p. 6 Best wishes, Small focus, big ambition p. 13 Northleaf secondaries Greg Getschow, Portfolio Manager, JPEL’s fund closes on $255m p. 6 The order of things p. 13 Australian LP to sell Massimiliano Saccone, Founder, Synthetic Chelsea Stevenson $1bn in PE stakes p. 7 Private Capital Editor – Secondaries Investor Rede Partners grows Emerging market secondaries capabilities p. 7 secondaries p. 14 Cristina Alcaide, Valerie Chen, Amit Mahajan PineBridge Investments Wellcome Trust to sell $750m venture stakes p. 7

Ironbridge progresses with $1.5bn restructuring p. 8

Boost to Morgan Stanley real estate fund p. 8

Allianz ponders portfolio sales into the contents listing p. 8

2 Secondaries Investor | Still Climbing’ News Compendium News headlines

Montana puts PE funds up for sale “We have been focusing on infra and energy because of the better risk-adjusted returns and opportunities we are finding” Fund interests from managers including Scott Chan, Chief Investment Officer, SCERS energy specialist First Reserve and mid- market firm Madison Dearborn are among the stakes that have been put up for sale by the Montana Board of Investments Real Assets fund, according to a filing with 2013, SCERS had allocated 21.8 percent (MBOI). More than 40 offers have come the Securities and Exchange Commission. of its $7.59 billion investment portfolio to in for the eight stakes from four GPs, alternative investments with 0.1 percent according to recent meeting minutes. The pension system has committed $100 dedicated to private real assets. million to the , SCERS’ The US public pension aims to take chief investment officer Scott Chan told SCERS’ target allocations for alternatives advantage of “the current valuation Secondaries Investor’s sister publication are 10 percent for hedge funds, 15 percent perspective and the good market Infrastructure Investor. The fund will real assets, 10 percent private equity and 0 timing and strong demand and ample focus on secondaries opportunities for to 5 percent opportunities. dry powder among secondary funds”, infrastructure and energy investments, and according to comments from chief SCERS expects to deploy the capital within Pantheon is a fund of funds manager that investment officer Clifford Sheets, as three to five years. invests on behalf of over 400 institutional documented in the minutes. investors, including public and private When asked if the separate account would pension plans, companies, Sheets added that the funds chosen for have a geographic focus, Chan said: “Part endowments and foundations. Its sale were not “troubled” but were funds of it depends on the type of partnerships investment solutions include customised that the LP had decided not to pursue an that are available in the secondary market separate account programmes, regional ongoing “strategic relationship” with. The –generally those types of assets are global primary fund programmes, secondaries, co- names of other fund managers have not in nature – but I think it’ll be a bit more investment and infrastructure programmes. been disclosed; meeting minutes note the skewed toward [the] domestic [market].” total NAV of the funds was $127 million As of 31 December 2013, Pantheon as of 30 September 2013. The fund will invest in multiple funds but had over $28 billion in assets under may also make direct investments in assets management. In addition to its London MBOI estimates that its private equity through opportunistic co-investments. As headquarters, the firm also has offices in allocation will be 10.4 percent once the for the energy investments, the mandate San Francisco, New York and Hong Kong. sale completes. It said that the decision covers oil and gas exploration and to sell some of its private equity exposure production, transportation and storage and was not to change the allocation of power, Pantheon confirmed. Volcker to be ‘acute’ driver of private equity, but rather to protect it secondaries dealflow should stock markets fall. MBOI said SCERS, which has sole and exclusive such a decline would probably result in fiduciary responsibility over the assets Secondaries dealflow is expected to be an increase in the weight of its allocation of the entire retirement system, has boosted this year as more banks respond towards private equity. not carved out a separate category for to incoming US regulation by disposing infrastructure. Instead, infrastructure falls of assets, according to private equity- It was unclear at press time whether under private real assets, which is a subset focused lawyers. MBOI had already sold all or some of of real assets, an asset class the pension the fund stakes. “Last week proceeds fund established in late 2011. “The final adoption of the Volcker Rule of $60 million were received and an has been a wake-up call for many of additional $30 million is due at the end of In addition to infrastructure, private the banks to start getting serious about June,” according to the meeting minutes, real assets – which has a target allocation disposing of their private primary assets,” which noted $36 million from a separate of 6 percent – also includes energy, said Michael Wolitzer, a New York-based secondaries sale was expected at the end timber, agriculture and other assets, partner specialising in fund formation of April. but there is no specific allocation for at law firm Simpson Thacher & Bartlett. each, Chan explained. “They now face lot of concrete events with concrete deadlines.” Sacramento launches secondaries “We have been focusing on infra and infra FoF energy because of the better risk-adjusted The rule’s final form was published in returns and opportunities we are finding,” December and now the most important The Sacramento County Employees’ he said. deadline is 21 July 2015. That’s the date Retirement System (SCERS) has hired by which banks must dispose of all private private equity firm to According to Infrastructure Investor’s equity assets they are barred from holding manage its Secondary Infrastructure and Research & Analytics, as of 31 December under the terms of the Volcker Rule, a

Secondaries Investor | Still Climbing’ News Compendium 3 News headlines

section of the US’ 2010 Dodd-Frank Act. Garrison. Still, though, he said, “it will Shackleton has opened a new office The rule restricts banks from trading off be very challenging for a US bank to in Edinburgh to support the portfolio their own accounts as well as limiting their maintain a significant amount of private companies, according to the statement. investments in private investment funds to equity investment”. no more than 3 percent of any one fund’s Publicly listed Sigma previously said it capital. The regulations will apply to US Masotti also warned of “all the indirect planned to withdraw from managing banks and to many non-US banks that consequences of Volcker that will keep funds and would retain an have a US presence. lawyers busy as they restructure some of LP stake after transferring the funds’ assets their clients’ investment interests”. For to Shackleton. When it comes to factors that will generate example, some investors may be treated dealflow in the (currently booming) as banking institutions by Volcker due The STVF raised £17 million ($28 million, secondaries market, “in the next 12 to 18 to their investment holdings in banks, he €21 million) in 2012 with limited partner months Volcker is going to be the most said. Insiders say this may apply to some contributions from the Bank of Scotland acute driver,” said Wolitzer. “I think 2014 sovereign wealth funds. and the Scottish Widows Investment will be a very active year”. Partnership, while the SIF raised £6 million All of this is expected to fuel more in 2008, according to data from private Goldman Sachs earlier this year noted secondaries dealflow. But given many equity and venture capital database PSEPS. it had set up a Volcker ‘implementation banks have already started divesting their team’, while other banks such as HSBC, private equity holdings, “It won’t be like Shackleton Secondaries II closed on £25 Unicredit, JPMorgan and Bank of America a snake swallowing a cow”, says Simpson million in 2008. The fund acquired 13 have already spun out – or started the Thacher’s Wolitzer. investments from 3i Group, including process to spin-out – their in-house private mobile payments business Macalla which equity arms. Shackleton sold nearly one year later, Private Shackleton acquires Sigma VC Equity International previously reported. “Secondary sales take time, so banks fund assets have already begun to dispose of private Shackleton manages four funds and equity assets and are actively making Shackleton Ventures has taken over the specialises in direct secondary venture arrangements to come into compliance management of three Sigma Capital Group capital investments. Founded in 2006, in what is now a relatively short time funds using its ‘Shackleton Secondaries Shackleton is led by Stewart and two frame,” said Joseph Marks, New York- 3’, a fund raised specifically for the deal. partners, Steve Burton and Deborah based head of secondaries at Capital The size of the fund and transaction were Hudson, according to its website. Dynamics, the private equity fund not disclosed. manager and advisor. “You don’t want to be the last man standing.” The funds include the Sigma Technology Infrastructure secondaries Venture Fund (STVF), the Sigma picking up While the rule isn’t ‘new’, legal sources Innovation Fund (SIF) and the Sustainable note its final iteration published late last Energy Fund and together have 10 The secondaries market for infrastructure year proved stricter than many banks had underlying portfolio companies across the is growing, fuelled in part by the disposal predicted in some ways. For example, IT, food technology and energy sectors. of pre-credit crunch private equity fund banks had hoped that they could continue stakes and assets that have left investors to hold, until liquidation, many private “[The transaction] gives a fresh start to the disappointed. equity investments they had already made. investee businesses, giving them sufficient However, lawyers say that the capacity to time and resources to achieve exit and “Some of these funds have underwhelmed,” do this is limited. will provide the investors with a route to said Andrea Echberg, London-based partner liquidity,” Shackleton managing partner and infrastructure specialist at fund of funds One notable exception, however, allows Hugh Stewart said in a statement. Pantheon. She notes that in some cases such for investments in offshore parallel funds are currently achieving unexciting net private equity funds by non-US banks, The portfolio companies, which are all returns of 4 to 6 percent, “which was not which previously hadn’t been allowed, based in Scotland, include internet video quite what infrastructure fund investors had pointed out Marco Masotti, New York- specialist Exterity, aviation software signed up for”. based co-head of private funds at law developer AviIT and engineering software firm Paul, Weiss, Rifkind, Wharton & company DEM Solutions. Advantageous pricing is also attracting investors to the secondaries market for infrastructure. “The primary market is crowded – particularly in core “In the next 12 to 18 months Volcker is going to be the most infrastructure, where there is a lot of acute driver” investor capital,” she says. “It’s difficult Michael Wolitzer, Partner, Simpson Thacher & Bartlett to find value, because of the supply and demand dynamic that flows from that.”

4 Secondaries Investor | Still Climbing’ News Compendium News headlines

Pantheon’s Echberg says the volume of “The primary market is crowded – particularly in core infrastructure secondaries deals Pantheon infrastructure, where there is a lot of investor capital” has reviewed has quadrupled since 2010 to Andrea Echberg, Partner, Pantheon more than $4 billion-worth last year. “Based on the first quarter of this year, I think we will exceed this in 2014,” she said.

By contrast, she continued, it’s possible to the other side, infrastructure assets are purchase stakes on the secondaries market scarce by nature, but we are beginning to Discounts narrow for US at a discount of around 20 percent to net see dealflow from the older investment buyout funds asset value (NAV) because of a relative banking-led infrastructure funds which are paucity of investors. nearing the end of their fund life.” While the net asset value for large US buyout funds rose by an average of 24 percent A New York-based secondaries specialist Infrastructure funds run raised by groups last year, the discount at which stakes in concurred that 20 percent discounts to including Goldman Sachs, Morgan Stanley these funds sell on the secondaries market, NAV were available if the infrastructure and JPMorgan are said to be among those on average, narrowed to 1 percent. This is funds on offer included assets that “did not with tail-end positions that would be ripe compared with an average of 7 percent at the live up to investors’ expectations”. for secondaries investment. end of 2012, according to Triago.

Most of those problematic investments This activity is not expected to be anywhere The placement and secondaries advisory were made in the years immediately before close to that being seen in the private firm said that an increasing amount of the credit crunch, he added. “Investors equity end of the secondaries market, funds are now trading above par value as buying into a toll road, in the expectation insiders caution, as the primary market more cash goes to the secondaries market. that income would grow at 3 to 5 percent, for infrastructure is still relatively young. “The return to favour of large US buyout in line with nominal GDP, suddenly “The allocations of LPs to infrastructure funds in the secondary market has been saw this growth disappear – wiping out haven’t yet reached their targets because particularly noteworthy,” the firm added. massive amounts of equity value.” infrastructure is still growing as an asset class,” said Yaron Zafir, head of secondaries Frustrated with the slow deployment Insiders are predicting that increasing at London-based advisory and placement rates of primary funds, more investors are supply on the infrastructure secondaries firm Rede Partners. This reduces the need starting to focus on the faster turnaround market will be matched by increasing for them to dispose of assets, he said. and the relatively low risk of secondary demand. “There’s a wall of capital from portfolios than returns generated from pension funds, sovereign wealth funds and Still, infrastructure secondaries are gaining discounts, according to Triago. insurers looking for easy-to-understand ground – last year advisory group Setter brownfield infrastructure without Capital said there had been roughly $700 The firm found that the average sale price construction risks,” says Tara Davies, head million-worth of infrastructure fund stakes of all funds sold on the secondaries fund of infrastructure mergers & acquisitions sold, equivalent to just under 2 percent of market has stayed within 8 percent of NAV at Macquarie Group in London. “On total secondaries activity across asset classes. over the past two years.

Discounts narrow for US buyout funds – Graph 1. Source Triago Discounts narrow for US buyout funds – Graph 2. Source Triago

Average secondary fund discount to net asset value Average top pricings FY 2013 170 NAV Last 6 months Pricing 100

130 75

90 50 Percent

25 50

0 Large BO US Large BO MM BO Venue Tail-End 10 EUR Capital

June 08 Dec 08 June 09 Dec 09 June 10 Dec 10 June 11 Dec 11 June 12 Dec 12 June 13 Dec 13 Secondary fund type

Secondaries Investor | Still Climbing’ News Compendium 5 News headlines

Triago’s figures cover various types of Founded five years ago, SharePost’s trading private equity funds, including portfolios platform has helped private companies, Landmark decision for that have infrastructure and real estate their shareholders and qualified investors Louisiana firefighters strategies, according to a spokesman. facilitate trades on the online secondaries market. According to its website, the The Firefighters’ Retirement System platform has completed more than 2,000 of Louisiana (FRSL) will commit $25 NASDAQ latest to launch private company transactions totalling $1 million to Landmark Partners’ latest fund, secondaries platform billion since 2011. according to LFRS investment committee minutes from April 10. NASDAQ has teamed up with SharesPost, an electronic platform for trading in Corporate Partners to restructure The US public pension system had private companies, to launch NASDAQ second fund previously earmarked $50 million for Private Market. private equity investment this year, half of Corporate Partners, the former private which it planned to spend on secondaries, “Built as a company-first platform on equity arm of investment bank Lazard, according to FRSL investment documents industry-leading technology, NASDAQ is looking to restructure its $1.1 billion from February. Private Market will provide qualifying 2005-vintage Corporate Partners Fund II, private companies the tools and resources according to two sources with knowledge FRSL had been evaluating Landmark to efficiently raise capital, control secondary of the deal. versus fellow secondaries fund manager transactions, and manage their equity- , but under advice related functions,” according to a statement. The process is being handled by Lazard’s from private equity consultants NEPC, secondaries advisory arm, with the ultimately chose Landmark because of The platform, launched in March, joins remaining NAV in the portfolio understood what NEPC called the “potential issue” a small number of similar electronic to be $500 million, according to one source. of the “very large size” expected for exchanges, including SecondMarket, Lexington’s Fund VIII. SharesPost, NYPPEX and Secondcap. Lazard declined to comment and When SecondMarket launched in 2009, Corporate Partners did not respond to In March Secondaries Investor reported secondaries market players reacted coolly. requests for comment by press time. that Lexington’s Fund VIII had raised more than $3 billion towards an $8 billion “The complexity of the transactions, Secondaries Investor understands target, while Landmark’s Fund XV had which often comprise a mixture of that Corporate Partners is seeking to raised at least $1.4 billion of its $2.5 different positions and assets, as well recapitalise the fund to allow current billion target according to SEC documents as tax and accounting issues, mean that LPs to leave the fund and to gather fresh filed in January of this year. only a few trades at the simplest end of capital for new investments. A regulatory the spectrum will ever get done,” one listing shows Lazard as having a $100 Referencing Lexington, NEPC representative secondaries investor told us. million commitment to Fund II. Jeff Roberts voiced concern over the market’s ability “to absorb that much capital”. For NASDAQ Private Market, securities- Corporate Partners spun out of Lazard related services will be offered through Alternative Investments in February Landmark has so far received commitments a wholly-owned broker-dealer and SEC 2009. It invests in minority stake mid- that include $100 million from the New registered alternative trading system, NPM market transactions in North America Mexico State Investment Council and Securities, said NASDAQ. and western Europe. Targeted deals range $60 million from the Ohio Police & Fire in size between $25 million and $100 , according to PEI data. Further services will be offered through million, and account for up to 49 percent a “global network of registered broker- of a target company’s share capital, Secondaries Investor has previously dealers” which NASDAQ said represents according to its website. reported that the New Hampshire qualified institutional buyers, family offices Retirement System committed $50 million and other accredited investors. Corporate Partners II pursued investments in to Lexington’s Fund VIII. consumer goods, financial services, general Private Market president Greg Brogger industrial and business services, health said member broker-dealers and their care, technology, power and energy and Northleaf secondaries investor clients would benefit from telecommunications, according to PEI data. fund closes on $255m greater access to “financial information, transaction flow and liquidity”. Corporate Partners is led by managing Canadian private equity firm Northleaf principals Jonathan Kagan and Michael Capital Partners has closed its first Minimum entry requirements set by Wildish, formerly general partners at specialist private equity secondaries NASDAQ include a minimum AUM for Lazard; and Ali Wambold, formerly chief fund Northleaf Secondary Partners, market participants of $50 million, with an executive officer of Lazard’s alternative according to an email from managing annual net income of $750,000. investment division. director Jeff Pentland.

6 Secondaries Investor | Still Climbing’ News Compendium News headlines

Turtle said: “Yaron is responsible for “The fund will continue to build on Northleaf’s existing private sourcing those deals himself and aiding equity secondary program” the team in its secondaries efforts: we are Daniel Dupont, Managing Director, Northleaf more in the market now than ever before because we have someone whose sole focus is secondaries”.

The fund raised $255 million in capital handle the superannuation fund’s private London-based Rede was founded in 2011 commitments, exceeding its initial target equity investments. by Scott Church, Adam Turtle and Sharare by $55 million. Hau. Church and Turtle previously worked QIC brought the portfolio to market to in the fund placement teams at Lazard and Secondaries Investor reported last take advantage of current high pricing, Credit Suisse; ex-RBS asset management November that the firm had passed its according to one source. team employee Hau departed Rede last target of $200 million, having raised $206 year under amicable circumstances. million at that time. The specific stakes being sold could not be determined at press time. “The fund will continue to build on Wellcome Trust to sell Northleaf’s existing private equity QIC declined to comment and QSuper $750m venture stakes secondary program by proactively did not return requests for comment by targeting traditional secondary market press time. The Wellcome Trust is selling a $750 purchases of fund interests as well as million portfolio of venture capital funds both structured and direct secondary QIC and QSuper have had close on the secondaries market, according to transactions,” wrote Northleaf managing connections since 2009, when former three sources. director and co-head of secondaries Daniel QIC head of asset management Brad Dupont at the time of the fund’s launch. Holzburger became QSuper chief The portfolio is likely to be split amongst investment officer, and QSuper outsourced several buyers. Wellcome, which is one of Northleaf said it was adding to its certain investment management Europe’s most highly regarded private equity secondaries team, with Brad Blowes joining responsibilities to QIC, according to investors, is looking to sell in order to take as an associate from CommonWealth, the reports from Australian publication advantage of the high prices being paid for hedge fund service provider. Investment Magazine. assets at the moment, said one source.

Northleaf Capital Partners has more A spokeswoman for the Wellcome Trust said than $5 billion in commitments under Rede Partners grows it was using the secondaries market as part management and invests in private equity secondaries capabilities of its portfolio review and asset management funds that have activity. “The Wellcome Trust is on record structures, according to PEI data. Rede Partners, the placement and advisory in recent annual reports as pursuing a policy firm, has appointed ex-Paul Capital of concentrating holdings into fewer, larger Northleaf has invested $60m in XPV vice-president Yaron Zafir as a principal positions,” said the spokeswoman. Capital’s Water Fund II and Georgian focusing on secondaries. Partners’ Growth Fund II, and in January The auction process is being managed by it announced the first close of its Venture Zafir spent six years with Paul Capital Cogent Partners, who declined to comment. Catalyst Fund on $217.45 million - short and was one of the US firm’s founding of its $300 million target. members for its European operations. Documents published by Wellcome for the In March, Paul Capital closed its doors year to 30 September 2013 showed total and made the majority of its investment gains from its asset portfolio of 18 percent, Australian LP to sell $1bn team redundant. or more than £2.6 billion, due to its public in PE stakes and private equity holdings, venture capital At Rede, Zafir will work with partner funds, hedge funds and residential property The Queensland Investment Corporation Adam Turtle in sourcing secondaries- interests recorded gains of between 15 (QIC), an alternative investment firm related business for the firm, with a percent and 20 percent. The Trust had and advisor, has hired secondaries broker particular focus on complex restructurings around $2.19 billion, or 7.8 percent of its Cogent Partners to sell $1 billion-worth of similar to the Motion Capital restructuring total $28 billion of investments, invested in private equity stakes on behalf of one of its that Rede advised on last year. venture funds as of 30 September 2013. Its pension clients, according to three sources. exposure to venture capital funds went up Turtle said Rede’s secondaries strategy 1 percent year-on-year. Two sources said the LP stakes belong would continue leveraging its GP and LP to QSuper, one of Australia’s largest relationships for secondaries and focus on In 2008, Peter Pereira Gray, Wellcome superannuation funds, managing in excess complex transactions where secondaries deputy chief investment officer, told of A$32 billion. QIC and would be helpful to a GP. delegates at the Private Equity Real

Secondaries Investor | Still Climbing’ News Compendium 7 News headlines

Estate Forum in New York that while the he said, referencing the high prices being group had identified fund interests it was Boost to Morgan Stanley paid for fund interests and assets in the prepared to sell, it would not do so “if we real estate fund secondaries marketplace. don’t get the right price”. Morgan Stanley Alternative Investment ACP has historically been “opportunistic” He added that the Wellcome Trust was Partners has raised $65.5 million in in the secondaries market, selling assets also prepared to buy private equity and commitments so far for its second such in 2008 when pricing was also full, and real estate positions from primary buyers, fund, according to an SEC filing. buying in 2009, when the firm “got lucky” with secondaries a “very interesting” area and valuations turned out to be at a to the charity. The Morgan Stanley AIP Phoenix Global trough, according to Lindauer. Real Estate Secondaries Fund II is targeting $500 million, and began raising However, Lindauer definitely does not Ironbridge progresses with commitments at the end of last year. want to be among the secondary buyers $1.5bn restructuring right now. “A lot of money has been raised Its predecessor, the 2009-vintage Phoenix and people can get debt more easily, so Boston-based fund of funds HarbourVest Global Real Estate Secondaries Fund I, pricing is frothy,” he said. will offer investors in two Ironbridge closed in March 2010 on $370 million, funds the option of leaving or joining a over its target of $250 million. LPs in the ACP has €1 billion (£811 million, $1.4 newly capitalised vehicle, according to first fund included Norway’s AP Fonden III billion) of capital to commit each year and two sources. and the West Midlands Pension Fund. plans to deploy close to €3 billion over a three- or four-year investment plan. Up to The A$450 million (€307 million; Morgan Stanley’s most recent secondaries €120 million can be invested in large pan- $420 million) Ironbridge Capital fund, Morgan Stanley Alternative regional partnerships and between €20 Fund launched in 2004, and the Investment Partners’ Global Secondary million and €40 million can be committed A$1.05 billion Ironbridge II launched Opportunities Fund II, closed on $770 to country- and sector-specific funds, in 2006, but is predominantly pooled, million in July last year, exceeding its $600 including emerging managers. ACP also according to PEI data. million target, reported Private Equity considers about 50 co-investments per year International at the time. and aims to commit to five. HarbourVest and Ironbridge were unavailable for comment at press time. Its previous Fund I, a 2009 vintage, raised Since inception, ACP has invested €6.4 $585 million, becoming fully invested in billion in a core portfolio of 70 private Ironbridge has been attempting a 2012. Before raising its debut fund, Morgan equity fund managers. The firm manages restructuring of its funds since early Stanley’s alternative investments group had a total of €9.18 billion on behalf of its 2013 after interest for a proposed $1 bought fund interests using capital from its parent, including direct investments in billion targeted Fund III failed. global private equity fund of funds. renewables and infrastructure.

Last year, New Zealand media company The fund of funds manager has $17 Lindauer joined ACP after working in MediaWorks, owned by Australian billion of assets under management, as of corporate finance at PwC and at Yahoo private equity firm Ironbridge Capital, 4 December, according to PEI’s research Deutschland. He leads ACP’s fund was placed in receivership with and analytics division. Morgan Stanley’s investments with Andress Goh, who works financial advisory firm KordaMentha, Alternative Investment Partners allocates in the firm’s Singapore office. according to a report from Private just under $1 billion to private equity. Its Equity International. first private equity investment was in 1994, Allianz has roughly €712 billion of assets according to the data. under management. Ironbridge acquired MediaWorks in 2007 for NZ$551 million (€299 million; $407 million at the time) excluding Allianz ponders portfolio sales debt, or NZ$727 million including debt. It may be time for Allianz Capital Partners, the investment arm of German LPs in the firm’s first fund included insurer Allianz, to clear out some of its the California Public Employees portfolio, ACP’s global co-head of fund Retirement System, UniSuper and investing, Michael Lindauer, recently told Pantheon International Participations. Secondaries Investor’s sister publication Private Equity International. Second fund LPs include AlpInvest Partners, California State Teachers’ “We’re not really in need of selling, but it Retirement System and GIC, the would be convenient to reduce our tail-end . and lower the administrative burden,”

8 Secondaries Investor | Still Climbing’ News Compendium Q&A

Ardian: we are not in a race to invest

Ardian managing partner and head of Ardian USA Benoit Verbrugghe plots a course for its recently raised $9 billion Fund VI and what the French firm plans to do next.

$9 billion is a huge fund size: what very important; we have the ability to select, sort of timeframe have you put on to pick and choose the assets that we like. its investment? Does investor expectancy mean you feel It’s true it’s a lot of money but the size of the pressure of the size of the fund? buy them, the monitoring is automatic. the fund we decided to raise is linked to Then when a transaction approaches, very the evolution of the market today. The The previous generation that we had was often we have a huge coverage, above 80 secondary market is linked to the evolution seven billion, including co-investment, and percent, on whatever deal comes to market of the primary market, and the money that we have been able to control the fund in and its underlying companies. is raised every year: today private equity three years without too much pressure, raises between $200 billion and $250 and it’s the same here. At the beginning of We have a really big team working on billion dollars each year. the fund year of course we want to deploy this all the time, and when you have money but we are not in a race. If we this vision, then you can understand the Benoit VerbruggheIt’s been that way for want to we have a five years of investment longevity of the NAV over the next year, many years, not just the peak in 2006 period, that’s roughly $1.5 billion a year. and then you can decide to use leverage. and 2007. Every big industry needs its It’s to maximise to some extent your secondaries market; this market is now Again you can find transactions today equity at work. The level of analysis we very active and bank’s compliance with the that get you there; GE Capital was $1.3 use use allows us to make the correct Dodd-Franck rules and Basel III are huge billion. If for the next generation fund choices in terms of leverage. drivers. What is interesting is that you have we think circumstances are not the same more and more investors, like pension we will raise less money. We know that Are GP restructurings a potential use plans, financial institutions, insurance we can raise and invest this fund in a for Fund VI? companies, endowments and family offices good condition, with no rush; to stay who are using secondaries as a tool. opportunist, and that’s what we have done We took a look at a lot of these GP for the last 15 years. restructurings. But today our strategy is You have a big pension plan in the US to focus on large or complex transactions that wants to rationalise the number of How do you balance the risk profile of composed either of a portfolio of interests relationships it has and crystallise the engaging leverage in your fundraising? or a portfolio of direct companies. That’s funds to which it is allocated. This was where we are strong, we can deliver; the setup for our $850m million deal with Yes we are using leverage, since 1999. We execution is very important. OMERS 18 months ago. They want to were one of the first to do that. But two go from fund of funds to direct. All these important things; first, we are not using We’re not so active right now in the GP conditions support a large fund like ours. leverage for every transaction; it’s really restructuring market; if some of our a case by case basis. It depends on the competitors like to do it, then it’s good, as The secondaries market is very active; as profile and the quality of the portfolio. The everyone has a way to find what’s right for a GP on the buy side you can find large second point is that we are cautious, and them. On our side we are not comfortable transactions between $500m and $2-$3 we want to stay cautious. You cannot use enough to go into that space, to get the billion. So it means that if you have a leverage on a statistical approach. What I quality of the assets that we are looking large fund you are able to underwrite mean is, we analyse everything. for; and so we’ve decided not to do any those kinds of deals, it gives you a type of transaction. competitive advantage. You have to know exactly what is in the portfolio of another manager when you are But you never know, if the situation came We have already made three transactions buying interests, you have to understand along where we knew the team very well with the sixth fund, and the fund is already the underlying companies. Ardian relies and we liked the assets then why not but around 20 percent committed since the on its strong analysis of hundreds of for us it’s not what we are doing right now. beginning of the year. We are staying funds every quarter, manager by manager, You will see more dealflow coming from selective with the fund, because dealflow is company by company. Even if we don’t that kind of manager in the future.

Secondaries Investor | Still Climbing’ News Compendium 9 Q&A

The ‘fantastic economics’ of secondaries advisory

In an excerpt from ‘Getting Complicated’, a secondaries feature in May’s issue of Private Equity International, six secondaries specialists talk to PEI’s Graham Winfrey about the “fantastic economics” of secondaries advisory and its resultant popularity, which is making the space more competitive. Capital Dynamics managing director Joseph Marks, Cogent Partners managing director Todd Miller, Landmark Partners head of secondaries Robert Shanfield, Park Hill Group managing director Adrian Millan, Proskauer partner David Tegeler and W Capital founding partner David Wachter trade opinions.

PEI: Did any of the big people moves in secondary market is getting much more Robert Shandwick: We’ve been doing the advisory community last year have significant, and the industry is justifying real estate secondaries for 20 years. It’s a an impact on the market? more advisors than it has in the past. In the market that in a lot of respects parallels plain vanilla LP interest transactions, from private equity, albeit with a timing lag. And Adrian Millan: Despite the moves that what I understand, the fees are getting it’s a really interesting place to be. took place, we did not see an impact on compressed, leading advisors to look to market volumes. There will always be pursue advisory work in the more difficult We all look back at the old days of private new and changing players in any growing and creative parts of the market, such as equity secondaries, when there were fewer marketplace. fund recaps. competitors and better economics at the individual transaction level. However, there Robert Shanfield: The other thing we’ve The other interesting thing is that no large was much less going on and the market seen happen in the advisory market investment bank has moved in to be a needed a lot of education. I think where is the growth of this sort of buy-side major player in this market. In fact, it’s real estate is right now is somewhere in the engagement. The matching of individual gone the other way, where guys have left midst of a similar evolution. interests buyers have in a specific LP bigger firms to start small, more specialised interest with a corresponding interest of an boutique shops. This may be because David Tegeler: We’ve been anticipating an existing LP to sell. the overall fee base of the industry is not increase in secondaries activity in Asia. As material for a big firm. a result, we’ve recently hired attorneys in It’s not clear to us how much this activity is our Beijing and Hong Kong offices with taking away from transactions that would PEI: Where is the best value to be experience in both private investment otherwise have been intermediated in sell- found? And to what extent are funds and secondary transactions. side engagements, or whether it is adding investors branching out into other or detracting from overall pricing efficiency types of private market secondaries, With respect to private equity real estate in the market. I think there are arguments particularly via separate accounts with secondaries, that does feel like something on both sides. But there’s no question the blended strategies? that’s been delayed. The volume appears economics are better for the advisors. to be increasing, however, and it could Adrian Millan: The best opportunities are have a big impact in the secondaries Todd Miller: The economics are fantastic. where access is limited, underwriting is market going forward. Actually better than our market. There are difficult, structuring is possible or specific people popping up everywhere trying to do expertise is required. this. I don’t think it had any impact on the market last year. Given these dynamics, there has been a meaningful uptick in GP recapitalisations Just three years ago the advisor space was as well as interest in real estate, energy, a duopoly. Every pension fund we went to credit and infrastructure secondaries. said we’re only interested in talking to two advisors. Now it’s not uncommon for us Joseph Marks: I think if you’re putting to show up and someone says, “I’ve been money in secondaries in the next three interviewing five or six advisors.” And years you need to have a longer view and that’s just in the US. not look at only this quarter and the last quarter. Personally, I think there will be just David Wachter: To me it’s a just a general as good a chance at buying at better entry recognition that the breadth of the values today than the other way around.

10 Secondaries Investor | Still Climbing’ News Compendium Commentary

Secondaries posturing on; I think there are fewer investors and you can do to add value once you close they are making bigger commitments. a transaction, not us or anyone else. You become a limited partner, unlike on the This is an opportunity, because if big primary side. On the primary side, you can [LPs] are making fewer but bigger buy something in an auction and you may commitments, what do they do with their have a better sense of how to manage the older funds? They can let them run down asset, a different strategy or a different exit or they can sell them. Given that investors and add value that way. So for secondaries, are generally making fewer but larger the key is how you buy it because once commitments, there does appear to be a you pay for it, your return is locked in. bias against the smaller funds. The more your pay for it, the lower your return. It’s a mathematical certainty. The middle ground is what’s really gotten squeezed. Groups in another part of The key is your posturing, where you’re the market, the billion-dollar funds, are positioned; the size of a firm determines its squeezed in the sense that if you can raise a transactions. If you’re a very large fund, billion dollars then you can raise more than you have got to do large deals and large Newbury Partners closed its Fund III a billion dollars. Most of those groups have deals tend to have intermediaries; they last week, breaking its hard cap of done that. A few years ago, there used to tend to be auction-based, they tend not $1.1 billion. Newbury Partners chief be many more groups in our space; those to involve services, it’s just about price. If executive officer Richard Lichter expands groups raised more money and they moved you’re on the smaller side, there are fewer on the market backdrop for his firm’s on to the bigger leagues. So if you look intermediaries and price is important but fundraising success and the importance at the landscape, there are really very few not the only factor. That’s why Newbury of staying small. groups in our space who are small enough has tried to stay small. And I think going that they can do small transactions but big forward, those lines of differentiation I saw some data saying that fundraising enough that they can source everywhere. become even deeper. Groups that really is pretty robust in the first quarter, but don’t have any differentiation go out of I’m not sure the overall numbers for The problem in general with the business and we’ve seen several examples fundraising tell the real tale of what’s going secondaries business is that there’s nothing of that in the secondaries business recently.

Institutional innovation secondaries market has to date been very There are a lot of investors within direct opaque, based around a joint advisory secondaries looking at non-performing and transactional model, but as the loans. A lot of private equity advisors are secondaries market matures it is becoming looking to buy those portfolios from asset more efficient. advisers. Banks with a lot of NPLs are a great source for the secondaries market. Investors become more empowered with greater knowledge of the market, so we A big current driver at the minute is the see the future as one where brokers such high pricing of assets which is attracting as Tullett will facilitate informed investors new entrants to the sell side. Secondaries to transact rather than advising and investors may not get the returns that they transacting for them. have got used to in the last couple of years: secondaries firms that look to produce The fund of funds model is expensive. an IRR return of 15 percent will struggle Investors have seen that this is the case, and when they are charging fees of 1.0 percent they have started to develop the capabilities and 10 percent in performance and higher themselves. Private equity has long liquidity prices means they may find it harder to Tullet Prebon’s global head of alternative terms and institutional investors are produce target returns. investments Neil Campbell sees the looking at their own costs and returns and growth of in-house secondaries at asking serious questions as to whether With many prime fund names trading institutional investors as a means to they can invest directly themselves. Direct towards par and sometimes higher in the avoiding fees through the traditional investments are therefore becoming popular. market, some buyers are being forced to advisor-led process. employ leverage which could be a high- You can see the distinction most clearly in octane strategy. As an intermediary, we see ourselves as real estate secondaries funds. If you’re an part of a market that’s developing, that’s insurance company, why wouldn’t you go becoming a lot more transactional. The and buy a building yourself?

Secondaries Investor | Still Climbing’ News Compendium 11 Commentary

Small focus, big ambition funds seeking to deploy hundreds of millions believe focusing our time and energy gives of dollars in diversified fund portfolios. us an edge and far greater visibility on the future growth prospects of our investments. At JPEL, we view secondary direct investments as concentrated private equity JPEL is a permanent capital vehicle that portfolios, single company investments and was created in 2005, the $150 million will top-heavy portfolios with one to three key be generated through distributions from company exposures that can be purchased JPEL’s mature underlying portfolio (the from existing investors seeking some form average age of JPEL’s portfolio is 7 years). of liquidity. In addition, we often target tail- Since December 2011, JPEL’s portfolio has end portfolios where one or two companies generated over $200 million of distributions. remain. In some instances, where it is JPEL’s portfolio manager, Greg Getschow, beneficial for growth, we may also provide We announced in January that we would outlines the publicly listed firm’s attitude companies with additional equity to continue seek to invest up to $150 million in 15 – 20 towards trends in the secondary market to expand and develop their business, private companies through January 2016. and why JPEL believes that the secondary whether organically or through acquisition. Our goal is to create a more concentrated direct market is particularly attractive in JPEL portfolio, with JPEL’s top 30 today’s environment. We look to identify companies that companies representing a significant portion share one or more of the following core of private equity value by January 2016. Over the past several years, as secondary attributes: seasoned investments with firms have raised multi-billion dollar funds, projected liquidity in 2 -4 years; entry Currently, we have deployed approximately competition for large, diversified portfolios values that represent a discount to intrinsic $50 million or one third of our target, in has increased significantly. As a result, value; visible growth prospects (i.e. growing four different investments. We have invested pricing has narrowed, making it difficult economies, industries or company specific in two European companies with global for many secondaries investors to deploy situations); manageable leverage; market presence, one US-based company and one capital in today’s environment. leadership; and downside protection. company based in Asia.

JPEL, along with other funds managed by By targeting investments in a smaller We have a very strong investment pipeline our team, tends to focus on a subset of the number of companies, we believe we can and currently have three potential deals that broader secondary market – secondary directs. conduct a thorough due diligence process could be completed over the next six months, We believe that secondary direct investments in order to make sure we have a clear and should these investments close, we will are an underserved portion of the secondary picture of their growth prospects and are be well on our way to having deployed market, often overlooked by larger secondary comfortable with the business plan. We approximately half of the $150 million.

The order of things Episteme, as Foucault wrote, means the diversified structures and propositions. historical a priori that backs knowledge This is bringing about a new importance to and its discourses, and represents the liquidity and to the role and need for well- condition of their possibility, expanding functioning secondaries markets. beyond science to include all social and cultural influences. As secondaries transactions become normal practice and liquidity options The new secondaries episteme, or order increasingly important, the notion of of things, encompasses the trading “private” is shifting from bearing a The secondaries paradigm is changing, methodologies and techniques that “secretive and opaque” nuance to more requiring better benchmarks, astute have been developed and progressively neutral “not listed in the public markets”. risk adjustment and savvier buyers, adopted and accepted over the last twenty Consequently, the definition of “fair writes Synthetic Private Capital founder years, but also the regulatory burdens value” is inexorably converging to the Massimiliano Saccone. being imposed against illiquidity and the pricing levels that are instrumental to marketing requirements for liquidity that secondaries liquidity. It might surprise you to find a reference any retail push implies. to French philosopher Michel Foucault at Performance and benchmarking standards the start of an article about secondaries. Many recent market volume reports state need to adjust to realistic terms and leave But the Greek term “Episteme” used in that the private equity industry is poised for aside useless propaganda refrains (does a $4 Foucault’s book “The Order of Things” continued growth; expanding towards retail trillion industry needs a quarterly reminder helps me to describe the paradigm shift I investors, 401-k’s and defined contribution of its outperformance, particularly if this is see occurring in the secondaries market. pension schemes internationally, with based on flawed data?).

12 Secondaries Investor | Still Climbing’ News Compendium Commentary

In the secondaries transition, the crucial from the increasing number of pro- five or more years ago, the risk premium price-performance relation has to be active secondaries sellers that are able balance seems to be more in favor of re-established so that investors are able to arbitrage certain pricing dislocations the sellers. Secondaries investors beware to judge performance in terms of risk tied to exuberant fundraising cycles, and when price and returns rely on leverage, premium and decide the strategy for from a new breed of contrarian value and beta exposure is symmetric: the their primary and secondaries private buyers that could step in the markets in new secondaries order of things requires equity allocation based on the expected periods of low liquidity and outbid the investors to understand their risk appetite co-movement of the target portfolio with conservative bargain-hunting competition more fully than ever before. listed markets, given their risk appetite. by strategically hedging market risk.

A more careful and rational pricing With secondaries pricing hovering around discipline is expected to derive both par, in particular for the vintage years of

Emerging market Investments expects emerging market secondaries a growing secondaries to take 10 to 15 percent “Going forward, PineBridge of the global deal flow, as from 2013 Investments expects emerging untapped opportunity onwards we continue to see a significant market secondaries to take increase in deal flow. 10 to 15 percent of the global deal flow.” Limited partners in developed markets have been the main sellers of private equity, using the secondary market as a Public markets in emerging markets portfolio management tool. At the same have higher volatility, compared to their There’s a new wave of supply in time, local institutional investors in counterparts in developed markets, and emerging market secondaries and emerging markets are bullding exposure to investors have to contend with headline buyers with local expertise are best private equity. and currency risk, leading to short- to placed to exploit these opportunities, medium-term dislocations. However, write PineBridge’s Cristina Alcaide, We believe that we are now at the point the current economic cycle in emerging Valerie Chen and Amit Mahajan. where the portfolio of many limited markets has the potential to lead to partners in emerging markets has started a better pricing environment which Secondary transactions involving emerging to mature, bringing with it the potential of presents an excellent entry point for markets assets are attracting increasing a new wave of secondary supply. secondary buyers. attention from investors due to the anticipated rise in secondary supply and Why do emerging markets offer an Despite the slowdown in growth, 2014 the potential to acquire assets at attractive attractive alternative to their developed and 2015 forecasted GDP growth for prices by exploiting market inefficiencies. market counterparts? emerging markets are 5.1 percent and 5.4

Traditionally, developed markets have comprised over 90% of total capital raised, Emerging market secondaries – Graph 1. Source: PineBridge Investments funded mainly by limited partners in the same region, according to the Emerging Capital raised for emerging markets (in US $ billion) Markets Private Equity Association. 70

As the private equity markets in North 60 America and Europe mature, investors 50 have turned their attention to emerging markets in the search of superior returns. 40 The amount of money raised for emerging 30 markets has more than doubled since 2007, which we expect to lead to a significant 20 increase in emerging market secondaries. 10

Emerging market secondaries is still in 0 its infancy and comprises only 5 to 10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 percent of the global deal flow, according Emerging Asia Latin America Sub-Saharan Africa Other to UBS. Going forward, PineBridge

Secondaries Investor | Still Climbing’ News Compendium 13 Commentary

percent, respectively, compared to Furthermore, the quality of GPs in emerging the region. Thus, we think that committed 2.2 percent and 2.3 percent for markets funds varies. They often have short investors, like PineBridge, with a long-term developed markets, according to track records, and some have high team local presence are in the strongest position the International Monetary Fund. turnover, and therefore, the risk associated to execute transactions. We believe that, given healthier balance with emerging markets GPs is significantly sheets and the diversity among emerging higher than in developed markets. In summary, the maturity of emerging markets regions, these markets still markets private equity, in conjunction offer better growth opportunities, Thus, only those who with deep knowledge with NAV build-up, the current stage of in other words NAV appreciation, about private equity in emerging markets the economic cycle, and an acceptance of than developed markets. are capable of underwriting and executing the secondary markets by local investors emerging market secondaries, by properly should drive emerging market secondaries Local knowledge can lead to successful addressing both the growth potential going forward. Secondary buyers with investing in emerging market secondaries and the risks. Such capabilities can local expertise, who are able to ‘look under only be found in committed investors in the hood’ and understand the embedded The lack of transparency and financial emerging markets with a longstanding risks, will be best positioned to take liquidity are common themes in emerging local presence. advantage of the opportunity. markets, with each specific country having its own risk profile. Without Preferred buyer features Cristina Alcaide is vice president, secondaries deep local understanding of the risks of PineBridge Investments, London. involved, it is very difficult to conduct GPs in emerging markets are growing Valerie Chen is vice president, secondaries due diligence and determine a fair price and eager to increase their relationships of PineBridge Investments, Hong Kong. for a secondary purchase, which may with investors, showing a preference for Amit Mahajan is director, secondaries of lead to an unprofitable investment. investors with a long-term commitment to PineBridge Investments, New York.

14 Secondaries Investor | Still Climbing’ News Compendium www.secondariesinvestor.com

About us SecondariesInvestor.com is the dedicated source of insight and intelligence for the world’s secondaries markets across the alternative asset classes including private equity, private real estate, infrastructure and private debt. It is relevant to everyone involved in the buying and selling of private fund interests and asset portfolios, including institutional investors, fund managers and their advisors. About our publisher, PEI As demand for alternatives has grown over the past decade, secondaries activity has flourished alongside primary markets. Secondaries Investor is published by PEI, the only global B2B Once considered a last resort for distressed sellers, or a stain on information group focused exclusively on private equity, private the perceived quality of the underlying assets, secondaries are real estate, private debt and infrastructure. As these four asset now an accepted portfolio management tool used increasingly classes continue to grow in scale and significance – for investors, by all types of institutional investors and fund managers. fund managers, financial practitioners and other service industries globally – PEI is positioned to provide unparalleled SecondariesInvestor.com tracks the institutions, funds and business knowledge and intelligence to these communities. transactions shaping the secondaries markets within private equity, real estate, infrastructure and private debt. Our online Formed in London in November 2001, when a team of news coverage delivers fresh reporting on the firms, the people, managers bought out a group of assets in an MBO from the deals and the data that are driving these communities and financial media group Euromoney PLC, PEI also showcases hand-selected, third-party commentary and has enjoyed more than 12 years of growth. Owned entirely by research from industry thought leaders. people who work in the business and with offices in London, New York and Hong Kong, we publish globally recognised Editorial contacts magazines and news websites, manage what is probably the most extensive set of databases dedicated to alternative assets, Chelsea Stevenson run more than 30 market-leading conferences globally and Editor, Secondaries Investor publish a large library of specialist books and directories. [email protected] Tel: +1 (212) 633 1455 We are the leading specialist information group dedicated to alternative assets. Amanda Janis Director – Specialist Investment Networks For more information visit: www.ThisIsPEI.com. [email protected] Tel: +44 (0) 207 566 4270

Philip Borel Editorial Director [email protected] Tel: +44 (0) 20 7566 5434