Friday, June 14, 2024

AlpInvest: LPs are shopping the ‘best parts’ of their portfolios amid distribution slowdown

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Private equity investors are looking to offload higher quality portfolios due to a slowdown in distributions, according to senior executives at the Carlyle Group‘s investment solutions unit, AlpInvest Partners.

“Institutional investors are getting less liquidity than they thought they would be getting, and that has led to a number of investors reconsidering what they want their portfolios to look like,” AlpInvest chair and Carlyle’s head of global investment solutions Ruulke Bagijn tells Private Equity International.

“LPs that want to rebalance their portfolios try to avoid discounts, and are therefore offering the best part of their portfolios to the market. There’s a natural selection towards quality. We’re therefore not only seeing a larger transaction volume, but also a higher quality transaction volume.”

Private equity exit volumes have plummeted. According to Bain & Co’s Global Private Equity Report 2024, buyout-backed exits declined by 44 percent in value and 24 percent in number last year.

This dynamic has coincided with increasing secondaries activity, says Bagijn. “It’s since the summer of 2023 that we have seen significant dealflow coming to the market; 2023 was the second-most active year on record for secondaries – $110 billion was transacted.

“We expect there’s going to be another $400 billion of private equity assets potentially come into the market in the next few years, as investors look to rebalance their portfolios.”

LP-leds represented 65 percent of the $27 billion-$32 billion of transaction volume seen in the first quarter of this year, according to a PJT Partners report.

In April 2024, Los Angeles County Employees’ Retirement Association sold a $1.4 billion-plus portfolio of LP stakes to a consortium of buyers, including Ardian, sources told affiliate title Buyouts. A month later, Washington State Investment Board was reported to be shopping around a private equity portfolio worth approximately $2 billion, around $500 million of which will be sold to Blackstone Strategic Partners, Buyouts reported.

In May, it emerged that Partners Group had stepped up as the buyer for UK pension fund administrator Universities Superannuation Scheme’s portfolio sale, affiliate title Secondaries Investor reported. USS had been shopping a portfolio of private equity fund stakes valued at $800 million or more.

When it comes to acquiring LP portfolios, AlpInvest prioritises newer assets rather than tail-end portfolios, says Bagijn. “We really want to buy younger funds with a maturity of three to six years, where we can still benefit from a long period of value creation.”

Quality and quantity

The Carlyle subsidiary’s secondaries business has committed more than $32 billion of capital to around 210 investments, according to its website. Within primaries, the firm has committed $47 billion to approximately 900 funds and deployed $17 billion across more than 350 co-investment deals. According to Bagijn, about 60 percent of AlpInvest’s portfolio is based in the US and 20-25 percent in Europe, with the remainder in Asia-Pacific and the rest of world.

Institutional investors in Asia-Pacific are still warming to the concept of portfolio sales. “We are seeing more first-time sellers,” adds Wendy Zhu, global head of primary fund investments and head of Asia secondaries at AlpInvest. “I would say the market is still more mature in the US in terms of accepting secondaries as a solution, but we’re seeing sellers from most key markets in Asia, including Taiwan, Australia, Southeast Asia, and Japan.”

Taiwan in particular has been home to a large number of portfolio sales in recent years due to upcoming regulatory changes governing their exposure to riskier assets. In March 2024, Cathay Life agreed to sell stakes in 21 private funds for around $1.2 billion to HarbourVest, including a stake in Blackstone Capital Partners VIII, affiliate title Secondaries Investor reported at the time. The same month, Shin Kong Life agreed to sell stakes worth $252 million and €33 million in five private funds, including Warburg Pincus Global Growth, to a consortium of buyers.

Newer sellers have learned that quality is key to getting transactions over the line, says Zhu. “Initially, they might consider only selling an older portfolio or underperforming names. But in this market environment, our view is that those portfolios don’t trade. We believe that’s when quality starts to come in, when sellers are looking to incorporate some of the higher quality assets in a portfolio.”

China in particular has seen less seller interest because of the associated discounts, Zhu notes. Jun Qian, head of private equity for China at Schroders Capital, told PEI in October, for example, that the firm was seeing discounts as high as 40 percent in yuan-denominated opportunities as liquidity constraints and a dearth of institutional buyers created additional leverage at the negotiating table.

“I think many investors now recognise just selling one part of the portfolio is probably not going to get you the price that you’re looking for and they understand the discount that they take to something like that, and it’s not just for China,” Zhu adds.

Though several of its peers, such as Schroders, Hamilton Lane and Coller Capital, have dipped their toes into yuan-denominated secondaries, AlpInvest seems unlikely to follow. “I think you need to have a dedicated team for the RMB market. It’s a different strategy and it’s not what we are focused on at the moment,” says Zhu.

Room for growth

Private equity’s exit slowdown has also prompted more GPs to explore alternative paths to liquidity, such as continuation vehicles. According to BlackRock’s H1 2024 market outlook on private market secondaries, GP-led secondaries accounted for 12 percent of sponsor-backed exit volume in 2023, up from 7 percent in 2022 and 5 percent in 2021.

Asia-Pacific’s private equity managers are also warming to the idea of GP-led transactions as part of a broader maturation within the region’s secondaries market.

“I think 10 years ago, a GP in Asia might get a bit offended if an LP wants to sell a position in their funds,” says Zhu. “GPs may think ‘Why would you want to get out of my fund? We’re doing fine.’ I think that narrative has changed in the last few years to: ‘How can I help you due diligence if the buyer is an existing LP?’ And in the case of GP-led processes starting to explore this as an option: ‘How do I talk to my LPs? How do I educate them? What assets are suitable?’”

Notable examples of GP-led transactions in the region include a $150 million three-asset continuation fund led by TR Capital involving India’s Samara Capital and its 2014-vintage Fund II in 2023. More recently, India’s ChrysCapital closed a roughly $700 million continuation fund backed by HarbourVest Partners and LGT Capital Partners. The vehicle involved the firm’s stake in the National Stock Exchange of India, which it acquired in 2016 via its sixth flagship.

Zhu believes such transactions still have “room to grow” within the region. “A lot of that needs to be driven by quality of assets and the manager quality as well, and it needs to have the runway of creating the next leg of value. There’s education with the GPs and LPs as well, understanding how it works.”

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