2010-vintage funds: what is still in UK portfolios

Below is a select list of UK-based firms that are still managing funds with a 2010 vintage. Mergermarket and Unquote have highlighted portfolio companies from these funds for which no deal has been publicly disclosed and that could come to market.

Augmentum I has a 10+1+1 lifespan. It invested £3-10m in businesses based in the UK and Hong Kong in the technology and e-commerce sectors.

Inflexion 2010 Buyout Fund has a 10+1+1 lifespan, according to Unquote Data. LPs include the European Investment Fund, F&C Asset Management, LGT Capital Partners, New York State Teachers' Retirement System and State of Wisconsin Investment Board. It invested in nine UK-based companies and seven of those have been exited.

Montagu IV targeted mid-cap and large-cap companies based in the Nordic region, Poland, Germany, the UK and France, according to Unquote Data. It invested in 15 companies, of which 12 have been exited.

Phoenix Equity Partners 2010 has a 10+1+1 lifespan. It invested £15-50m in UK-based businesses worth up to £200m operating in the financials, business services, media, consumer, industrial and healthcare sectors.

Buying time
Of course, private equity managers now have a number of options available to them when funds near the end of their lifespan.

The most obvious one is a straightforward fund extension, alleviating the pressure to exit all assets before the optimal exit window arises. A number of funds were able to negotiate further extensions to the market-standard 10+1+1 following the global financial crisis (GFC), usually with some compensation for LPs. The latter have traditionally been minded to work constructively with their managers in these situations, to a point – the risk of PE houses managing "zombie funds" still running after 15 years or so has been a big turn-off for institutional investors in the past.

Sam Kay, a partner at law firm Travers Smith, says the jury is still out as to whether a surge in GPs triggering extensions (or asking for additional ones) is on the cards: "Given the relatively short period of time since the outbreak of the coronavirus pandemic, we have not yet seen a particular focus on fund extensions. Whether this will become a more significant feature is likely to depend on the length and impact of the lockdown. There is a lot of chatter about potential opportunities when the crisis eases, which would imply that private equity managers may not need additional time to complete their investment programme. But the longer the crisis goes on, I'd expect a more circumspect approach until there is a better understanding of the impact of the pandemic on different businesses and sectors."

But others in the market are more confident that holding periods will increase across the board in the medium term, thus making fund extensions unavoidable. "Over the coming 18 months there will be a significant uptick in fund extensions," says Antoine Dréan, chairman and founder of fund advisory Triago. "In general, they're likely to be granted without much difficulty, just as they were during the GFC."

But Drean also points out that GPs will not just sit out and try to ride out extensions. "You'll also probably see a rise in deal structures designed to both generate liquidity and give assets more time to develop," he says. "Somewhat counter-intuitively, growth targets that exceed pre-crisis aims are likely to be part and parcel of these deals. For example, we think there will be a proportionate increase in partial realisations designed to deliver liquidity to investors, while also providing a longer growth runway for the asset in question, frequently paved with new capital from new investors. This type of deal model was much less developed going into the last global crisis.

"Overall, we expect GPs to be more proactive and imaginative than they were during the GFC when it comes to finding ways to accelerate growth during an extended exit slowdown. Exit droughts become opportunities when they permit GPs to conceive and execute more ambitious, longer-term plans that can drive even better multiples on investment and higher annual returns. Of course, such a strategy for dealing with an exit drought dovetails with LPs' growing comfort with longer hold periods – provided they're justified by return targets."

Click here to see an Unquote analysis of how the GFC affected average holding periods in Europe, and how these were tracking prior to the Covid-19 outbreak

Secondaries to the rescue
Even before the coronavirus pandemic, the secondaries market was increasingly being explored by private equity houses as an alternative to a sale process, as reported by Unquote. Many GPs will now go beyond the traditional dual-track options of IPO and M&A sale, and will routinely ask themselves whether a single-asset secondary sale or restructuring constitutes a viable alternative exit route.

One would typically expect a straight M&A process to get the best price due to the higher competitive tension or strategic synergies. But during this time of uncertainty where many processes are on hold, not least because valuations might be depressed, secondaries could provide a viable alternative to accepting a discounted price in a portfolio company sale.

"After the GFC there was a pause in deals as investors got their bearings, but even then, you saw sophisticated LPs leverage the secondary market in order to react to market realities," Claire Woolston Commons, head of strategy at online secondaries platform Palico, recently told Unquote. "What is different now is that secondaries is a much more developed market, having grown fivefold, so you'll see more LPs look to secondaries in order to adjust their PE portfolios at a time like this."

But there are also suggestions that appetite on the buy-side could cool off in the coming weeks, at least until updated valuations for Q2 and possibly Q3 are on offer, as reported by Unquote. "Some GP-led deals could be underwater over the coming quarters with firms committing the cardinal sin in secondaries – losing money," Mark McDonald, global head of private equity at DWS, told Unquote. "Some actors may find they simply overpaid, and, with leverage on top, the new valuations don't match up." Even opportunistic buyers on the hunt for a bargain may be minded to lie in wait until the full impact of the Covid-19 outbreak is more clearly visible.

Market players are expecting the underlying portfolios of private market funds to see an average 9.5% drop in value by the end of Q1 2020 (compared with Q4 2019), according to a recent survey from Setter Capital recently covered by Unquote. Valuations are expected to drop again to 12.6% on average for the second quarter of this year, when updated portfolio NAVs are released.

By Greg Gille, Denise Ko Genovese and Himali Saini, with analytics by Mate Taczman

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• Topics
• Investments
• UK / Ireland
• GPs
• Inflexion Private Equity
• Phoenix Equity Partners
• Montagu Private Equity
• Exclusive
• Unquote Data
• Secondaries