Secondary directs have become increasingly popular as the private equity market continues to mature and LPs look for liquidity solutions for underperforming or old investments. Players active in this space, who are looking to expand their portfolios further, are increasingly looking towards corporate owners interested in divesting non-core assets for deal flow.
Such is the mindset of players such as
Roland Dennert, partner at Cipio Partners explains the benefits of buying from a corporate: “The big difference between buying from corporates and private equity firms is you only have one party to deal with, which makes it easier. If you’re dealing with a private equity fund, there are so many different issues. The GPs are concerned with their management fees and their reputation in the market and the LPs are concerned about getting their money back. Those deals are often smaller than corporate transactions and can be trickier because you have to deal with all these constituents.”
He adds: “About half of our deal flow today is corporate. Corporate venture activity will always come and go due to the venture capital cycle. When things start going well, these corporates will try and get into venture and when things go poorly, they want to get out. It is cyclical. Corporate venturing activity has recently been on the increase. But four years down the line, these corporates may look to sell again.”
Earlier this year, Cipio Partners acquired virtually all assets of the Siemens Venture Capital (SVC) Communications Fund from global electrical engineering and electronics concern Siemens. The acquisition qualified as one of the largest venture secondary direct portfolio transactions completed in the last few years.
As EVCJ went to press, Nova was about to complete the £75m acquisition of the Barloworld Scientific Laboratory Group of businesses from Barloworld Limited, a South African listed international industrial company, subject to regulatory approvals.
The Barloworld Scientific Laboratory Group of companies designs, manufactures and distributes equipment and consumables for scientific, clinical and industrial laboratory applications. The products are sold in over 100 countries and are principally designed and manufactured in the UK.
David Williamson, managing director of Nova highlighted the attractions of the portfolio as a group of quality businesses with experienced staff, a strong customer base, highly respected brand names and well established distribution throughout much of the world.
Nova and Pantheon Ventures provided the equity funding to support the acquisition and to finance the strategy to develop the business and HSBC Bank provided the debt.
Nova has in the past used high profile fund managers such as Coller Capital, HarbourVest and Pantheon Ventures to co-invest in these deals, but it is rumoured that the team will soon be out on the fund raising trail courting investors for their own independent vehicle. Fellow investor in the space, Vision Capital raised its first independent fund in May last year and has the potential, through a series of parallel investment vehicles to reach an eventual programme size of €1bn.
Last year Vision added to its corporate portfolio acquisitions with the purchase from Northern Foods of four of its businesses for £160m. These included Fletchers Bakeries, Smiths Flour Mills, Park Cake Bakeries and Chilled Pastry and marked Vision Capital’s first foray into the own label and branded food product sector.
Vision Capital CEO Julian Mash explains the merits of corporate portfolio transactions. “In contrast to private equity portfolio transactions, corporate portfolios almost always involve their management in equity ownership for the first time, and involve financing the companies independently for the first time. What is identical is that we focus on supporting the strategic development plans of the businesses for the medium term, having delivered a comprehensive exit for the seller.”
The latest transaction from Nova follows on from the acquisition in August 2007 of two US manufacturing subsidiaries RollEase and Diacom, from Gartland Whalley & Barker plc, a privately held group.
Nova currently manages 10 portfolios incorporating 55 businesses, representing total funds under management of around €800m. The portfolios comprise both private equity secondary assets and subsidiaries from large corporates.
The firm had also originally acquired four venture portfolios, which spun out of Nova some 18 months ago and are now managed by Tempo. Managing director Michael Kelly explains why their focus had to change: “What we discovered is that the venture business model is very different to the buyout model. It is impossible to build a business with different business models and the separation made sense to both parties. The Nova model operates most effectively when we have control positions in companies and this is not the case in ventures.”
Corporate portfolios, on the other hand, are a different matter: “Corporate portfolios are a hot area for us – buying groups of businesses from corporate owners. It works well because these teams are well trained corporate executives used to reporting to a centre and so engage with their new private equity owners easily and wholeheartedly. Obviously, owning 100% of the equity makes it much easier to influence events. It’s an area of enormous potential for us – we need to persuade more CEOs that this is a strategy they should consider.” Therein lies the challenge for these players. And the next hot sector Nova has its eye on? Hedge funds, says Kelly. “They will be our next big target – those who have significant holdings in private equity and who, when the going gets tougher, will need liquidity.”