How has Apax’s shelved fund revamp affected the secondary market?

Apax Partners considered restructuring its seventh fund in what would have been the largest secondary restructuring deal the market has seen.

The idea was floated with the fund’s limited partner advisory committee. But last year it was ultimately pulled back before ever becoming an official process, sources told Buyouts in recent interviews. Secondaries Investor earlier wrote about the deal.

Now, some secondary-market professionals are hoping the shelving of such a high-profile offering doesn’t cause other GPs to skip out on similar processes. The Apax situation “has made GPs think very carefully,” said a secondary-market executive. More than ever, LPs are “focused on the rationale for [these] transaction[s],” the executive said.

Others secondary professionals said, however, that deal activity remains strong and that a few other large deals in the market will help highlight the importance of these liquidity processes for GPs eager to deal with older funds.

Direct secondaries like restructurings have increasingly driven transaction activity in the secondary market. Evercore found that direct secondaries and GP-led liquidity processes represented 31 percent of the $54 billion of total deal volume in 2017, up from 29 percent in 2016. Of the GP-led deals last year, 55 percent were restructuring-type transactions in which assets moved out of older funds into new vehicles; and 45 percent were tender offers in which LPs had the option to either sell their fund stakes or hold.

Giant deal

“If it had got done, it would have been a game-changer,” a separate secondary-market source said about London-based Apax. “This would have been a step up in scale.”

Apax worked with adviser Campbell Lutyens on the offering. The deal as discussed would have allowed LPs in Fund VII, an 11.2 billion euro buyout fund raised in 2007, to sell their interests in the fund or roll into a new vehicle created to hold remaining portfolio companies.

Estimates of the size put the remaining net asset value in the fund at more than $4 billion. The largest fund-restructuring deals have hovered around $1 billion, with Warburg Pincus’s strip sale of Asian assets out of its 11th fund coming in at $1.2 billion.

Europe Fund VII was in the first year of its extension period, and Apax believed it could maximize the value of those assets with more time to sell them, sources said.

But the offering remained exploratory and never got to the level of an LP vote, sources said. Apax explored the idea with its LPAC but realized the interest level was not high enough to warrant the deal. “They were just consulting with investors. … The deal wasn’t launched into the secondary market,” the first secondary-market source said.

So what happened?

Multiple sources said the idea was doomed from the start simply because it wasn’t necessary. While many such deals are initiated by LPs looking for liquidity in older funds, too many Apax investors simply wanted to stay in Fund VII and ride it out. Europe Fund VII was generating a 1.3x multiple and a 5.03 percent net internal rate of return as of Sept. 30, 2017, performance information from Washington State Investment Board shows. A person with knowledge of Apax pegged performance at net 1.5x multiple and an 8 percent net IRR as of the same date calculating returns off of euros rather than dollars.

The challenge in restructurings is bringing together often diverse LPs who have different interests. Some may want a deal to get done and others may be happy to do absolutely nothing, stay in the fund and wait for the manager to close it out in the term set in the LPA.

Even on deals that make it to an LP vote and receive approval, a transaction can collapse if not enough LPs choose to sell their interests in the fund, making it less attractive for new investors to buy stakes and invest fresh capital into the deal.

Some sources expressed concern that the shelving of such a high-profile deal could send ripples through the secondary market, causing other big-name GPs to hesitate before making a similar move.

All eyes are now on a few other large deals that would instill a lot of confidence in the large side of the market if they make it to completion. One is Nordic Capital, which is working with Campbell Lutyens to restructure its seventh fund, a 2008 vintage, 4.3 billion euro pool. Coller Capital and Goldman Sachs are said to be leading the process, according to media reports.

“There’s a lot of activity out there and we’ll keep seeing that as some of these private equity firms try to get creative on some funds and wind down old funds and try to capture some of the [carried interest] and rebalance,” said a third secondary market executive.

Update: This report was updated to include more performance information about Europe Fund VII.

Action Item: Check out Apax’s Form ADV here: http://bit.ly/2CkW4FC

A 120-meter (393-foot) long sculpture of a 17th-century London skyline is completed for an event where it will be set alight, retelling the story of the 1666 Great Fire of London, on Aug. 30, 2016. Photo courtesy Reuters/Peter Nicholls