Single-asset secondaries offer unique opportunity for buyout-like returns

PARTNER CONTENT

The GP-led secondary market continues to evolve and flourish, supported by ongoing demand for liquidity and a narrowing bid-ask spread between prospective buyers and sellers. The GP-led secondaries market has grown more than sevenfold in less than a decade, from $7bn in 2015 to $52bn in 2023, with the single-asset continuation vehicle market undergoing substantial growth. In this Q&A, Nash Waterman, Portfolio Manager and Head of Private Markets Secondaries at Morgan Stanley Investment Management, discusses the burgeoning opportunity set for single-asset GP-led deals.

What is the origin of GP-led secondaries investments and how has the market evolved?

Nash Waterman (NW): GP-led deals were initially designed in the early 2000s to help managers of private equity portfolios spin out of banks. Single-asset transactions are now the fastest growing segment of secondaries.1 They potentially enable GPs to continue to own high conviction assets in their existing portfolio with unrealized growth potential, while permitting optional liquidity to underlying limited partners. The adoption of the GP-led market may continue to create opportunities for GPs, portfolio companies, as well as existing and prospective LPs.

What draws investors to single-asset GP-led secondaries?

NW: We believe single-asset GP-led secondaries offer the most advantaged access to top-quality assets in the middle market. Primary deal activity has outstripped secondaries demand, growing the universe of investable assets. This allows managers like Morgan Stanley to identify and invest in what we believe to be the best assets held within already highly selective private equity portfolios. We believe a continuation thesis supporting a strong-performing asset alongside a highly motivated sponsor can present attractive risk-adjusted returns for investors. Furthermore, an allocation to a single-asset focused secondaries fund can help an allocator to efficiently capture value that they might have otherwise lost when assets are sold into continuation funds, thus enhancing overall risk-adjusted performance.

What characteristics are you looking for in an asset for these transactions?

NW: To invest resiliently, we identify businesses that will grow through benign and volatile market conditions. This approach draws us to companies that provide a solution that lowers the overall cost to customers. Such opportunities may arise from technological advances or services that better address the evolving needs of customers, often solving problems that did not exist 10-15 years ago. Businesses that focus on creating efficiency and enhancing the customer value proposition become essential for their customers and may thrive regardless of market/cycle timing.

What skills

KKR looks to private credit firms to finance Perpetual deal

A number of private credit firms including Blackstone have held talks with KKR & Co over providing a debt package of at least $525m to support the buyout firm’s bid to acquire Perpetual’s corporate trust and wealth management units, according to a report by Bloomberg.

The report cites unnamed people familiar with the matter in revealing that the discussion have focused on possible funding channels including a private credit loan, with KKR planning to raise separate financing for each of the businesses.

On Monday, Australian-based wealth manager Perpetual confirmed it had entered into exclusive discussions with KKR for the sale, five months after announcing a review of the two units aimed at unlocking value for shareholders.

Swedish private equity firm EQT had earlier expressed interest in striking a deal with Perpetual, according to reports, while in December, the business also rejected a AUD3.5bn bid from Australian investment firm Washington H Soul Pattinson & Co.

NextPower V ESG reaches $745m at second close

NextEnergy Capital (NEC), a global renewables manager specialising in the solar infrastructure sector, has held the second close of its fifth strategy NextPower V ESG (NPV ESG) with $745m in capital commitments, having raised an additional $265m since first close.

The fund is still targeting a total of $1.5bn with a $2bn hard cap.

The new capital includes commitments from a UK LGPS investment pool, a Dutch pension fund and another re-up from an existing NextPower III ESG investor. These new investors join existing investors KLP, a German occupational pension fund, and a large Nordic pension fund. NPV ESG will continue welcoming further capital, with several investors currently active in due diligence.

According to a press release, upon reaching its investment ceiling and delivering c4GW, NPV ESG is forecasted to generate enough clean energy to power the equivalent of up to 1.1m households per year and avoid an estimated fossil fuel consumption of up to nearly 220m cubic metres of natural gas annually.

Goodwin adds two Partners to UK private equity practice

Global law firm Goodwin has appointed Ian Keefe and George Weavil as Partners within the firm’s private equity practice in its London office, which covers M&A, private investment funds and debt finance.

Keefe focuses on pan-European and international PE and M&A transactions for corporates, institutional investors, alternative asset managers, senior management teams, founders and portfolio companies. He advises on transactions including leveraged buyouts, consortium deals, bolt-on acquisitions, carve-outs, co-investments, minority deals, recapitalisations, divestments, distressed M&A, public-to-privates, joint ventures, reorganisations and restructurings, as well as general corporate matters.

Weavil advises private equity investors and other financial sponsors on transactions including buyouts, disposals, bolt-on acquisitions, co-investments, incentivisation schemes, reorganisations, restructurings and general corporate matters. He has also previously advised businesses and investors in identifying and assessing ESG-related risks and opportunities in the course of a transaction.

Keefe and Weavil are the latest additions to Goodwin’s UK PE practice over the past 18 months following those of Partners Jacqueline Eaves, Arvin Abraham and John Anderson.

Blackstone and Goldman to provide funding for $7bn L’Occitane buyout

Blackstone and Goldman Sachs are lining up to provide around $1.6bn in funding to support a potential take-private deal for L’Occitane International by the company’s owner Reinold Geiger, which could value the skincare business at about $7bn including debt, according to a report by Bloomberg.

The report cites unnamed sources familiar with the matter as revealing that Geiger is considering making an offer for the L’Occitane shares he doesn’t already own at HKD33 to HKD34 as early as Monday.

According to exchange filings, a vehicle ultimately controlled by Geiger, L’Occitane’s chairman, already owns more than 70% of the company.

Trading of L’Occitane shares was suspended in Hong Kong on 9 April, pending an announcement related to takeover codes. The stock closed at HKD29.50 a day earlier, giving the company a market value of about $5.6bn.

According to Bloomberg’s sources, talks are ongoing, no final decisions have been made and details such as price and timing could still change.