Despite a temporary cooling down while buyers and sellers await clarity around valuations, secondaries are expected to nd new opportunities in the uncertainty caused by the crisis, while developing and consolidating strategies suitable for a private equity landscape affected by liquidity concerns.
One such strategy consists of bundling up a group of underperforming assets affected by the crisis and transferring them into a separate vehicle, suitable for an ambitious and resourceful LP base. This could mean breathing room for many companies that were healthy before the outbreak and started to underperform when their sector or their supply chain were hit by the crisis.
“The idea is to separate assets into two categories, a good and a bad pile,” says Nico Taverna, a partner at Mill Reef Capital. “The latter would be composed of risky and underperforming assets affected by the crisis and with an uncertain recovery path ahead of them. They could include risky assets or companies that have the clear potential to recover if the economic scenario improves.”
By segregating the two groups, the GP could deploy a targeted and tailor-made strategy to support the struggling assets’ recovery, without excessive write- downs and avoiding depleting capital, nor impairing the portfolio’s combined performance.
“Moving some troubled assets to another fund can be a possible solution if there is a funding need within the portfolio that cannot be met by current LPs,” says Ely Place Partners’ Daniel Roddick. “This cashow need could be because the companies are underperforming or need more time and capital to reach their potential.”
When mixed, these assets might negatively impact the entire portfolio, while divided they make it easier for the GP to appeal to different LPs able to sustain and fuel a successful recovery strategy.
“This type of GP-led transaction would focus more on the additional capital coming in rather than on the ability of investors to roll over and hold their position in the portfolio,” says Sam Kay, a partner at Travers Smith. “This would create a balance between maintaining your investors economically interested in the portfolio and bringing in extra capital, which is going to dilute the existing investors.”