Keyhaven eyes Q4 2023 fund launch amidst lower mid-market GP-leds boom

Harriet Matthews
20 March 2023

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Lower mid-market GP-led secondaries specialist Keyhaven Capital is expecting to launch its next fund in Q4 2023 as it surveys the growing traction of continuation funds in its target segment, partner Teddy Mouawad told Unquote.

Its 2021-vintage third secondaries fund is around two-thirds deployed, Mouawad said, adding that the firm will be having discussions about what the target of its next fund will be later this year.

The sponsor invests in European lower mid-market GP-leds and secondary directs, having shifted its focus from primaries to secondaries in 2012. It has a EUR 50m-EUR 100m sweet spot for its deals but can go up to EUR 500m. Keyhaven usually takes a board seat and aims to act as a partner to its companies, Mouawad said.

"This part of the secondaries market is undercapitalised and our deals are often relationship-driven; we pay lower multiples and use less debt, away from auctions," he said. "We have always initiated high-level discussions for GP-leds, then followed on with broader syndication, and we will stick with this approach," he said. In the current market environment, the sponsor is seeing even more "backdoor discussions" rather than formal processes, he said.

The current environment is also leading to more LP-leds with motivated sellers, Mouawad said, with investors looking to mitigate the denominator effect and demands on their time and capital from re-ups. In spite of the increased dealflow in this segment of the secondaries market, Keyhaven does not typically engage with LP stake deals. "We don't like the risk profile and we want to generate higher returns – and we're seeing continued strong activity in GP-leds," he said. "With M&A down and the IPO route cut off, GPs are holding onto their flagship assets."

While the most headline-grabbing continuation funds are typically found in the large-cap space, this exit route is making waves in the lower mid-market, too. "In this area, there is stronger dealflow and a better supply of potential assets, but you have to be more selective," Mouawad said. "There is now more focus on performance in this space and we are seeing more deals falling through because of this selectivity on the part of both sponsors and advisers."

There is less syndication potential in this part of the market, with just two or three parties often involved and with sponsors usually eyeing their preferred buyers. This makes for high barriers to entry. "Although more and more secondaries' firms are being launched, the typical lower mid-market buyers universe is very niche and the market doesn't usually operate via big processes," Mouawad said. "We're often the majority investor and the preferred first point of contact."

Keyhaven is aiming for "steady deployment" in 2023, Mouawad said. "You can't stand still in uncertain times with market dislocation."

Against this backdrop, the firm is focusing on several factors when making its investment decisions, including companies' ability to service their debt, their exposure to energy prices and inflation, and their sales performance in a recessionary environment. "We're sector-agnostic, but we are seeing opportunities in niche leaders with low levels of leverage in the healthcare, business services and manufacturing sectors," he added.

Keyhaven's recent investments include Capital D-backed Phrasee, a UK-headquartered business that uses AI to generate marketing copy. It has also backed deals for businesses including Italy-based pet accessories producer MyFamily, as well as Germany-headquartered recommerce platform Rebuy.