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Editor’s Letter: A megaimpact from a megadeal

A megadeal doesn’t happen in isolation.

It doesn’t just emerge on the scene, everyone gawks, it gets done, and then everyone goes back to what they were doing.

It has consequences. And in the private equity secondaries market, the advent of the $5 billion megadeal is likely to have a major impact.

Two megadeals are in the market. One is a traditional LP-stake sale, being sold by Japan’s Norinchukin Bank. The portfolio is largely unfunded, meaning the buyer, in this case Ardian, doesn’t have to produce $5 billion up front. Instead, it will fund the commitments over time as the managers call capital.

The second $5 billion is a GP-led fund restructuring being explored by Energy & Minerals Group. The GP, an oil-and-gas-exploration-focused shop, wants to move several large assets out of older funds into a new vehicle. The deal would give EMG more time to manage the assets and provide liquidity to LPs in older funds.

Norinchukin’s huge sale is already wrapped up, taken down by Ardian after a limited, competitive process. Only a handful of firms could realistically compete for a deal of that size and all of them had a look, sources told me.

Ardian came away the victor in part because the firm doesn’t have to compromise on price. As one of the largest LPs in the business, it has a good view of underlying assets in funds and can quickly determine whether it wants to compete and how much it will pay. Ardian also generally syndicates its deals out to LP co-investors, spreading around the cost and exposure of large deals.

EMG’s deal is considered more challenging and it remains to be seen if it gets done at $5 billion, or at all. The issue is a concentration of risk in several large assets and the need for the buyer to be comfortable with oil and gas companies — not necessarily the purview of many secondaries buyers.

Still, that the Norinchukin deal got done at all could be viewed as a sign to other sellers that such deals are possible. Sources told me that secondaries brokers traditionally capped big portfolios at around $1.5 billion to $2 billion, assuming that the market wouldn’t bear anything larger.

Now, perhaps those caps have been rendered obsolete. And while not that many institutions are looking to sell megaportfolios, a handful of pensions and sovereign funds could indeed choose to sell that much private markets exposure.

I’m not anticipating a market rush of $5 billion transactions, but the door has been opened for a few more portfolios of such size to come out. It’s only going to add to the crush of volume that is taking this market to levels no one could have imagined a decade ago.