Secondaries Deal of the Year: Kaiser Permanente

In the depths of the bank crisis last year, with markets cratering and deal pricing wildly fluctuating, one of the largest-ever secondaries sales found its way to final close, blazing like a beacon for the rest of the market that buyers remained ready to proceed. Kaiser Permanente, a healthcare provider and non-profit healthcare plan, closed its around $5 billion private equity portfolio sale in June, pushing through the market chaos flamed by the collapses of Silicon Valley Bank and Credit Suisse.

Three buyers acquired the portfolio, with the largest portion taken by Ardian. Apollo Global Management’s new secondaries group called S3 and Blackstone’s Strategic Partners were the other buyers. PJT Park Hill worked as secondaries adviser with Kaiser.

The sale traded within a 10 percent discount to net asset value, sources have told Buyouts in past interviews. This was strong pricing at a time when asset valuations became uncertain as bank collapses disrupted the market.

Kaiser’s sale, its second large secondaries transaction, was mostly completed within a quarter, with the bulk of the deal being done around April after being launched at the beginning of the year. The remainder of the sale closed around June, sources said.

At the time, GP-led secondaries activity was slowing from a widening bid/ask spread, and LP sellers were reluctant to bring portfolios to the market amid pricing uncertainty. As the market watched the Kaiser sale proceed and eventually close, it helped convince potential sellers that buyers were ready to transact at reasonable prices, despite the market turbulence.

“There were a lot of assets and a lot of value moved in a relatively short period of time. That’s a testament to the focus and commitment to all the parties involved,” says Fadi Samman, partner with Akin who worked on the deal representing Apollo S3.

“Last year the story was of investors trying to solve liquidity issues to free up capital to make new commitments. That was a large piece of the story last year in the secondary market and this deal was one of the first to get that ball rolling and in a large way,” Samman says.

Second-half action

The sale may have had a knock-on effect on the GP-led side of the market. The deal closed in the summer, while secondaries pricing overall strengthened through the second half, helping convince sellers on the LP and GP sides to bring processes to market. Total secondaries volume tallied around $109 billion, according to Lazard’s full-year volume survey. LP sales came in around $61 billion and GP-led deal activity was estimated at around $48 billion, Lazard found.

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Number of LP sales last year over $1bn, compared with 12 such deals in 2022

GP-led activity was slow in the first half but surged in the second half ending up around $52 billion, according to Jefferies’ 2023 activity survey. The LP sale volume tally represented a 7 percent increase from 2022.

One big factor helping drive LP sales was pricing, which averaged around 85 percent of net asset value, increasing 400 basis points from the prior year, Jefferies found. Buyouts pricing reached 91 percent of NAV and buyout funds represented about 72 percent of total volume, the survey said.

There were 19 LP sales last year over $1 billion, compared with 12 such deals in 2022, Jefferies found. “In 2022, the dynamic was LPs taking big portfolios out to market and really just whittling it down and cherry picking to a smaller subset of funds pricing well,” says Matt Wesley, global head of the private capital group at Jefferies. “With overall pricing improvement on the LP side, that facilitated some of these bigger deals and by extension drove volume much higher.”

That was the case with Kaiser: closing a massive LP portfolio was challenging, but in this case the underlying funds and GPs were high quality and included names like Hellman & Friedman and Veritas Capital.

The Oakland-based organization in 2022 worked with M2O on a sale of about $1.5 billion of PE fund stakes, Buyouts reported. That deal was envisioned to be larger but was pared down, sources said. It’s not clear how much that deal ultimately closed on.

As fast as Kaiser is selling, it previously built up its private equity portfolio. The system grew from about $6 billion in private equity NAV in 2019 to $33 billion in 2021, largely under the direction of Anton Orlich as head of alternative investments. Orlich left last year and joined California Public Employees’ Retirement System.

Kaiser is apparently using secondaries sales to rebalance its portfolio, which grew so quickly it became overexposed to private equity, sources tell Buyouts. Kaiser is not alone in using sales to rebalance, as many LPs are contending with overexposure challenges and are considering sales.

Further motivation comes from the slow exit environment. With distributions down, LPs are looking for ways to generate liquidity to make commitments to new funds and fund re-ups.

At near-par prices (or at least not more than a 10 percent discount), LPs are more open to selling. We’ll see how that dynamic plays out this year as we wait for the next bellwether transaction.