French alternative asset manager Ardian has agreed to purchase a portfolio of private-equity (PE) fund stakes worth $1 billion from Singapore sovereign wealth fund GIC, a report said, citing industry sources.
Citing people familiar with knowledge of the deal, Bloomberg reported that the PE firm made a preemptive offer to GIC at a premium to book value to avoid an auction, which would have created competition and increased the price. The individuals involved requested anonymity due to the confidential nature of the information.
To date, both GIC and Ardian have declined to make public comments on this transaction.
Said to be amongst the most active buyers of PE funds, Ardian raised $9 billion to invest in secondary deals earlier this year.These deals occur in the private equity secondary market.
In this market, pre-existing investor commitments to PE and other alternative investment funds are traded.
The absence of an established market for trading these interests and facilitating such secondary deals between PE funds and hedge funds can result in these deals being both more complex and labour-intensive as compared to primary deals.
When exiting an investment, PE firms have three options; a corporate acquisition, an IPO or a secondary deal (i.e. selling a company to another PE firm). Jeff Golman, vice-chairman of investment banking group Mesirow Financial, has noted in a Forbes column: “While corporate acquisitions still lead the way in overall percentage of exits, secondary deals have become an increasingly preferred method for private equity firms looking to sell in recent years.”
Goldman noted this shift toward secondary transactions increased in 2014, with 1H 2014 seeing $19.1 billion of secondary PE deals – highest volume seen since 2007, with corporate acquisitions as a percentage of private equity exits at an all-time low.
According to Golman, preliminary data from 1Q 2014 showed that 45 per cent of all PE exits originated from secondary buyouts, compared to 36 per cent of all exits in 2007.
Sellers of private equity investments divest not only their investments in the fund but their remaining unfunded commitments (to the fund) as well. This is mainly because, PE as an asset class, is highly illiquid by nature and is intended as long-term investment for buy-and-hold investors. Such investors tend to be institutional investors like pension funds, endowments and family offices.
This is despite such transactions becoming more difficult to complete, especially with heightened interest from the US Securities Exchange Commission (SEC).
In particular, this interest is focused on stapled secondary deals. This is where investors in a private equity firm’s existing funds get the option to sell their portfolio stakes to new buyers who pledge additional fresh capital to the firm’s latest fund
PE Hub explains that in these deals, “…new investors buy assets out of an existing fund, and provide capital for a new fund – effectively helping a GP raise a new vehicle. Existing LPs in these deals usually get the option to either sell their stake in the old fund, usually at a discount, or roll their interest into the new vehicle.”
The transaction provides a fund manager with anchor investors for the new fund, infusing more capital and creating a new fee stream. The SEC’s concerns here is regarding the execution of fiduciary duty and offering frauds by firms or personnel within the firms.
Buyout firms are selling more assets, making the stakes more valuable.
The agreement with GIC comes just weeks after Ardian’s deal to acquire a $1.5 billion portfolio of fund stakes from the Abu Dhabi Investment Council – a government controlled fund manager – collapsed following valuation concerns.
Related Stories: Singapore’s GIC to invest $300m in JV with Indian realty major DLF