What if I want to hold on to one asset in my portfolio…forever?
This is a common question we get from a variety of sponsors in the market, so we interrupt our regularly scheduled topic therefore to address this question put forward by many readers of the previous issue of 60 Seconds. Last week, I talked about why and how you might manage out the entirety of your legacy portfolio. My underlying assumption was that LPs in an older vintage fund with 3-4 assets might be better served with a total liquidity solution consummated through a process that is equally beneficial to the manager. Many of you came back to me with thoughts and inquiries centered around the question: Can I buy out just ONE asset in my portfolio and leave the rest to be sold in ordinary course? The answer is a resounding “yes.”
Until recently, prospective buyers of legacy assets believed that only size and diversity were key to properly pricing a secondary. GPs would keep all their assets together in the existing fund vehicle or in a sale to a new SPV, but in both cases the emphasis was on a portfolio-wide liquidity solution. Today, single asset acquisitions are becoming more common for a variety of reasons, most notably because at-present too many dollars are chasing too few deals. In fact, the first quarter of this year was the best three-month stretch of fundraising ever for secondary funds, with six funds closing on a total of $13.6 billion, according to a report released by Preqin last week.
Within this growing base of large secondary funds are strategically-minded LPs now keen to back a manager in a single asset acquisition. For a quality asset, you can effect an outright company specific sale, at par, to a new fund you manage with a new foundational LP while leaving the remaining assets in their existing vehicle; this structure works as long as you can (1) demonstrate substantial upside to the purchasing LPs who would benefit from a longer hold period outside the current end-of-life fund structure and (2) offer existing LPs the right to sell outright rather than extend or roll their interest forward around this one asset.
In effecting a “single asset” sale solution, you can avoid the debate around value or the administrative burden of effecting a “portfolio solution” where the driving purpose of any such transaction is to extract more value out of a single outperforming asset. The prevailing assumption around any such single asset sale is that LPs receive par and thus avoid any contentious debate around value.
Rather than selling prematurely, it may make sense for you to consider a single asset sale for a portfolio company at its inflection point and where “the option” to extend the hold period is in the mutual interest of all parties. Our Secondaries team is eager to hear if this kind of transaction may be a fit for one of your funds. Please reach out to us if you have interest in exploring this new structure.
Next on 60 Seconds with Sixpoint: The Attraction of Investing in a Re-sized or Re-Positioned Fund with a New Story
Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).