Buyers tweak investment strategies in anticipation of downturn

Secondaries buyers are changing their approach to portfolio construction in anticipation of bumps in the road ahead.

Speaking at the British Private Equity & Venture Capital Association‘s secondaries forum in London on Tuesday, Pomona Capital partner Oliver Gardey said that the possibility of a slowdown means the portfolio of its latest fund, the 2018-vintage, $1.8 billion Pomona IX, is less reliant on short-term exits than its predecessor.

“With our previous fund, we were in an environment where the pricing was very high but you had strong visibility on exits and high velocity of cashflow on exits,” Gardey said. “We took the conscious step to have a short duration portfolio, sacrificing a little bit of multiple for good IRR… [Now] we’re looking for assets that can be very resilient in an environment with long hold periods.”

Having such large, diversified pool of assets to choose from allows secondaries firms to construct a portfolio that is less exposed to market cycles than other private equity firms. “You can pick the assets you think are resilient and fit the next stage of the cycle,” he added.

Charles Smith, managing partner and chief investment officer of Glendower Capital, said that while he doesn’t envisage a correction resembling that of 2009, micro-shocks such as Brexit could become the new normal. With rising public markets no longer a given, the firm is making more concentrated bets on businesses that it thinks will outperform and positioning itself to quickly take advantage of discounts when they present themselves.

The firm is in market seeking as much as $2.5 billion for Glendower Capital Secondary Opportunities Fund IV, according to Secondaries Investor data.

“In an environment where you’re seeing things go sideways, you need to become an asset picker,” Smith said. “The run-up in the public equity markets over the last eight to 10 years has supported a lot of the growth in private equity valuations. It’s becoming more of a micro game, not so much an index game.”

Zoe Yeo, investment director with Headway Capital Partners, warned that the larger auctions, bigger funds, high pricing and piles of leverage in the secondaries market are reminiscent of the buyout market prior to the last crisis. The flexibility of the market, however, means there are ways to ride the cycle.

“Even in 2009, when the market was at a standstill, you could do lots of structured secondaries, deferred equity type transactions… We’re definitely thinking more carefully about which areas we do and don’t want to be in versus a broader approach.”