Standard Life fund can buy secondary funds through secondary market

  • New fund can buy stakes in secondaries fund
  • Secondary deals for secondary funds very complicated to price
  • Previous SL Capital funds netting strong returns

Standard Life’s private equity unit set a $400 million target for a secondaries fund that can buy stakes in other secondaries funds, among other strategies, according to documents released by the San Bernardino County Employees’ Retirement Association.

Secondary market acquisitions of secondary funds represents just one component of the fund’s strategy. The private equity team, known as SL Capital Partners, will also use SL Capital Secondary Fund III to buy stakes in active funds of funds and direct private equity funds, according to an NEPC description included in San Bernardino County materials.

Acquiring a stake in a secondary fund from an existing limited partner presents several challenges, a source with knowledge of the strategy said. The buyer would have to conduct due diligence on each of the targeted secondary vehicle’s fund holdings, as well as the portfolio companies underlying those holdings. As such, the deal would be “very difficult to price,” the source said.

Perhaps for this reason, SL Capital did not acquire stakes in a secondary fund through any of its previous secondaries vehicles.

That said, much like secondaries funds, fund of funds holdings also include stakes in direct private equity vehicles, which presents similar challenges. SL Capital purchased LP interests in fund of funds via the secondary market on multiple occasions through its previous two vehicles, according to San Bernardino documents.

SL Capital’s first secondaries fund, a $190 million 2014 vintage, netted a 16.2 percent internal rate of return through Sept. 30, according to the NEPC memo. Fund II, which raised $291 million in 2015, netted a 65.3 percent IRR through the same date.

Those returns are relatively immature and will likely adjust over time. However, on average, the secondary stakes acquired through Funds I and II were already 78 percent funded at the time of their acquisition, according to NEPC. With that much capital drawn, both funds could deliver meaningful returns very early in their life cycle.

San Bernardino’s investment committee voted to move forward with a $25 million re-up to Fund III at its April 12 meeting. The $8 billion pension system’s retirement board will vote on the commitment at its next meeting.

The $8 billion pension system previously committed $25 million to each of the firm’s previous secondaries funds.

As a “cornerstone” investor in SL Capital’s first secondaries fund, San Bernardino County negotiated very favorable terms on its proposed commitment to Fund III, according to retirement system documents.

San Bernardino County will pay an annual management fee equal to 0.40 percent of the fund’s net asset value, almost half the 0.75 percent rate paid by other LPs, according to an SL Capital presentation released by the retirement system.

Certain Fund III investors will also receive discounts for larger commitments. SL Capital will cut management fees by 20 percent for LPs who allocate $50 million or more. Allocations greater than $25 million in size will receive a 10 percent discount to their management fee.

The general partner will commit $1 million to the fund. SL Capital will take 10 percent of Fund III’s profits over a 10 percent hurdle rate.

Though higher than the standard 8 percent hurdle rate, SL Capital gradually lowered its preferred return with each iteration of its flagship secondaries fund. The GP had to deliver a 14 percent return on Fund I before collecting carry. Fund II had a 12 percent hurdle rate, according to San Bernardino County documents.

With headquarters in Edinburgh, Scotland, SL Capital has approximately 10 billion euros ($11.3 billion) under management, according to San Bernardino documents. The firm is led Senior Managing Partner and CIO Peter McKellar and Managing Partner Roger Pim. Partners Stewart Hay and Patrick Knechtli are secondary market specialists at the firm.

Action Item: To access San Bernardino County’s reports on SL Capital, visit and click on the April 12 investment meeting materials.

Photo: People pass stock index tickers at the Singapore Exchange (SGX) premises October 17, 2013.  REUTERS/Edgar Su