GP Profile: Searchlight sees opportunity in volatility

US-based Searchlight is currently raising for its third-generation fund, which held an interim close on $3.1bn in May 2020, following a first close on its target of $2.75bn in July 2019. LPs in the fund include the California State Teachers Retirement System (CalSTRS), Canada Pension Plan Investment Board (CPPIB), Florida State Board of Administration and the Massachusetts Housing Finance Agency Retirement System, each with commitments of, or more than, $150m, according to Unquote Data.

Searchlight founding partner Oliver Haarmann told Unquote he had seen the denominator effect mute some LPs' appetite. "Overall, though, people are bullish on the PE asset class. They saw it do very well in the global financial crisis of 2008, but still, the market is very bifurcated."

Searchlight III has a mandate to pursue complex transactions including distressed debt purchases, post-reorganisation equity purchases and bankruptcy reorganisations, followed by debt-for-equity swaps, minority private equity investments, leveraged buyouts, corporate partnerships, public equity purchases, and subordinated debt instruments with equity optionality, in both western Europe and North America.

Haarmann says: "When you have the level of volatility we're looking at now, it can constrain deal activity. When it is hard to predict what the rest of 2020 and 2021 will look like, it is similarly hard to value a business or even get financing.

"Having said that, volatility does create a lot of opportunities. There will be companies that need capital and shareholders who will need to sell assets to shore up their holdings, and there will also be companies trying to acquire their competitors. As we also invest in distressed situations, this volatility can bring good opportunities for us."

Searchlight II closed on $1.9bn in December 2015 and is now fully deployed. Its LPs similarly included CPPIB and the Florida State Board of Administration, as well as several European LPs, such as SwanCap Partners, with a commitment of $10m, and Lombard Odier, with a commitment of $22.5m.

Offence and defence
When discussing the management of the existing portfolio, Haarmann says: "We're playing offence and defence with our portfolio now." He told Unquote the firm tends to invest in companies with high recurring revenues. "Generally, these businesses have not faced too much volatility, with little exposure to the consumer sector," he says.

One such investment is in Opus, a Sweden-based company that manufactures collision and mechanical diagnostics technology. Searchlight de-listed the company for SEK 2.47bn ($262.18m) in December 2019. The offer represented a 42% premium on the company's unaffected share price. Its technology is involved in vehicle inspection and emissions testing – a sector that, due to regulation, has high recurring revenues.

"We're also working on contingency planning if there's another lockdown or downturn, as we're building budgets for portfolio companies," says Haarmann. "We'll start agreeing budgets for 2021 imminently."

Haarmann says the firm has also taken "offensive" steps to strengthen portfolio companies where growth opportunities are available. He cites Italy-based wireless broadband provider Eolo, in which Searchlight II took a 49% stake for €150m in January 2018, according to Unquote Data.

"Eolo has had 25-30% annual revenue growth this year because more people wanted higher-quality broadband throughout the lockdown," says Haarmann. "We invested to accelerate capital expenditure, marketing spend and service installation so it could meet the increased demand."

For another portfolio company, Global Risk Partners (GRP), Searchlight supported an inorganic growth strategy throughout the coronavirus crisis. The insurance broker, in which Searchlight took a majority stake in February 2020, has made eight acquisitions since March.

"The company is buying smaller businesses, where the owners are worried about longer-term volatility, or feel like they do not have enough resources to invest in the business if the crisis persists," says Haarmann. "But these are high-quality assets, with good customer bases and good technology. GRP was able to make the acquisitions with debt and preferential acquisition terms, which we supported as shareholders," he says.

GRP was the firm's first investment in the financial services sector. Says Haarmann: "Businesses need insurance policies if the economy is good or bad, so GRP is very resilient and quite cash-generative. The insurance brokerage market is also very fragmented. We're going to keep looking at insurance-related services off the back of this investment."

Following the listing of two US-based portfolio companies this summer – Rackspace and Shift4 Payments – the firm could make some more exits in late Q4 of 2020 or Q1 of 2021. Says Haarmann: "We're looking at a couple of exits and we could have had a couple more this summer, but this brings me back to the volatility in the market, such as the upcoming US election, Brexit negotiation brinkmanship, increased climate disruptions on an unprecedented scale, and the coronavirus pandemic."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• GPs
• In Profile