- Single-asset deals require more scrutiny because of concentrated risk
- Staples can work in narrow circumstances, but may impact pricing
- Mega-deals have become the norm in today’s market
Jeffrey Keay is a managing director at HarbourVest Partners focusing on secondary transactions. Keay took a few minutes to speak with Buyouts about the state of the secondary market, which appears to be on pace to at least match last year’s record-breaking deal activity.
1.) What does secondary deal activity look like right now?
With Q4 valuations coming in, it’s adding even more stability in the market. There was a little bit of concern with what the volatility in Q4 in the public markets would do to private valuations. Those have held up pretty well. The type of volatility that could have contributed to wider bid-ask spreads hasn’t really materialized, helped by the strong performance of public markets. I expect to see near-term appreciations in value and potential for good liquidity out of private equity portfolios.
2.) What do you think about single-asset deals?
We’re seeing a lot of them. We like them, but we’re selective. We’re looking at the quality of the assets, the quality of the lead sponsor managing the asset and obviously price. And with a single asset, I’d say there’s more emphasis on each of those variables being above the bar you want to set.
[In a single asset deal], you lose some of the benefit of a diversified portfolio, but you have to feel good about the one asset you’re buying and its ability to generate compelling returns. For it to become an attractive secondary opportunity, it has to have an attractive profile not just in terms of ultimate returns, but the cash-flow profile. A single-asset deal that resembles more of a traditional direct investment with a four-to-six-year hold, that doesn’t feel like it’s going to compete well with some attractive opportunities we see with some regular-way secondaries.
3.) What do you think about tender offers with stapled components, which have earned something of a negative reputation in recent years?
Those transactions can be well-suited for a situation where the alignment between the LPs and the GP [is still working] at whatever point in time we’re talking about for the fund life, year five or 10. … If you find yourself approaching year 10 and the alignment is not working, either because of the economic terms of the fund [or] maybe the fund has not generated enough return, … tenders don’t work in those situations. Because the buyer just inherited the same situation a selling LP is selling out of. That shows up in the price and in demand that buyers may have in those situations. Straightforward LP tenders can work maybe in a narrower set of circumstances.
4.) How does a staple component impact overall pricing on a secondary deal?
With staples for attractive GPs that have proven track records and are of high enough quality, relative to their peer group, I think staples do not negatively influence price. But as you get into GPs looking to complete deals and asking for more capital that maybe have more risk, or need more consistency in track record, that can result in lower prices or demand from buyers.
5.) I reported recently on two deals in the secondary market valued between $4 billion and $5 billion each. How do deals of that size change the dynamic in the market?
Ten years ago it would have moved the market, and I think it would have sent shock waves through the system. But the market has grown in deal volume, and capital available for deals is now at levels that deals like that have a place in today’s market. It’s noteworthy, but I don’t think it’s a game changer.
Edited for clarity by Chris Witkowsky
Action Item: Reach Jeffrey Keay at 617-348-3536