Diamond finds a new niche

A new liquidity

source is opening up for private equity fundraising. SVG Advisers raised €400m in the structured finance market, following the successful closing of SVG Diamond Private Equity, a €400m CFO of private equity funds.

Private equity CDOs are not an entirely new game, with Pine Street from American International Group and Silver Leaf from Deutsche Bank Capital Partners both closing out of the US in 2003.

SVG Diamond Private Equity is unique, however, in that it is a managed cash arbitrage deal, rather than specifically designed to remove the private equity assets from the balance sheet.

Underlying spread compression in corporate bonds and ABS has made CDOs referencing new asset classes even more attractive for investors, which was one of the key themes that came out of the marketing period.

“Investors are hungry for yield and they also want diversification,” said Neil Basu, head of CDOs at Nomura, who added that private equity was uncorrelated to standard CDO assets. “We anticipated that there weren’t going to be a large number of investors taking part but we did end up with a nice mix of people familiar with the asset class and some that are new to it,” said James Orbell from Nomura’s syndication desk

Without the use of a wrap, SVG Diamond issued four tranches denominated in both euros and US dollars. The Triple A rated Class A1 and A2 notes priced at 90bp over the three-month benchmark. Double A notes priced at 160bp, while Single A rated notes were indicated and priced at plus 240bp.

The ramp-up process is also quite unique. SVG Diamond initially purchases a secondary portfolio of interests in about 20 private equity funds, as well as making commitments to some 40 primary private equity funds.

In order for these to be well diversified in terms of vintage year, geography and by manager, SVG Advisors will buy €100m–€150m worth of seasoned funds over the next six months to one year, from vintages going back to the early 1990s.

The remaining funds will be spent over the next three years, in order to ramp the portfolio up to €540m. That means there will be an over-commitment facility of 133%, supported by a liquidity facility of €100m.

Nomura said it expects further structured private equity mandates in future. As Basel II kicks in for banks and S&P driven capital requirements impact on large companies, the structure lends itself to bespoke solutions.

There are also implications for the secondary market. By lowering cost of capital through leverage, the vehicle would be an effective bidder for secondary assets versus pure equity funded vehicles.