How to access private equity returns with far less risk

Without jargon, what are the different areas of the private equity market?

Gabriel Ng: I would broadly segment the private equity market into three main areas. First, would be primaries. So this is where a general partner or a GP raises a fund from LPs or limited partners who provide the capital for the GP to raise a fund and subsequently deploy that capital into a portfolio of companies. So that would be the first main area of the private equity market. 

The second is what I would call co-investments. So this would be a situation where the fund has an opportunity to invest in a company that is too large for the fund to absorb on its own. So it needs to seek external capital from co-investors to help them step up to such large transactions.

And the third broad area of private equity would be what I call secondaries. So this is broadly further segmented into two other categories called LP secondaries and GP-led secondaries. On the LP secondary side, it is really investors providing liquidity to LPs who wish to exit from a fund before the end of the fund life. And for the GP-led continuations, this is really the GP taking some of its high-performing assets and moving them into a continuation vehicle to give those assets some additional time to accrete value and to find an optimal exit outcome.

Within those three areas, where are you seeing the biggest supply-demand imbalance today?

I see it from broadly two angles. The first is financing. As we all know, we are living in a high interest rate environment, which is vastly different from the environment that we have navigated over the last seven to 10 years. So with financing getting more expensive and leverage becoming harder to procure, as some of these banks have stepped away, for these sponsors to get some of these deals done, they have to put in a larger equity ticket. 

This has given rise to the opportunity to do more co-investments simply because the debt financing markets are not able to provide the same quantum of leverage as they might have done so over the last seven to 10 years. 

The second key area of constraint that I see is really around the exit environment. And as we all know, IPO markets are subdued. There's a lot of volatility in the market. So sponsors are facing challenges in terms of exiting their investments. So I think there are some solutions that folks like us could actually provide. So this is in the form of partial recaps. We're buying a minority stake in a high-performing company, allowing the GP to retain the majority stake and riding the next three to four years to eventual exit. 

The difficult exit environment is also creating opportunities for GP-led continuation funds. As you can imagine, if a fund is at the end of its fund life and there are some assets remaining in a portfolio, the exit environment is not optimal for selling those assets. 

The GP may believe these assets have an additional runway over the next three to four years. So they might choose to move some of these assets to a continuation fund, and therein lies the opportunity for secondary buyers to capitalise on such vehicles and take advantage of the current market conditions. So that is how I see some providers of capital playing in today's market environment.

Can you provide an example of where you're seeing that supply-demand imbalance at work? 

Without going into specific names, we see what we call multiple "mid-life" opportunities. So this is us taking a minority stake in a company that a GP has already owned for a period of time. As a very practical consideration for the GP to raise its next fund, it will need to show some distributions in its prior fund. So a natural way to do that is to exit some of these companies. 

But if the exit environment is tough or they're not getting the valuation that the market is giving them, therein lies the opportunity for someone like us to come in and acquire a minority stake in some of these high-performing companies. As a result, we can get exposure to co-investments, which we would otherwise not have had exposure to in the past. 

So that's what we call a "mid-life" deal. That is a significant proportion of the deal flow that we see today. A lot of these opportunities are actually originated by us. So this is us understanding the portfolio of the GP and proactively reaching out to create such opportunities for us to have a win-win situation, frankly, between the GPs and ourselves.

What kind of returns would you typically expect from those mid-life opportunities?

We typically still underwrite them to standard private equity returns in the buyout space. So north of a 20% IRR or north of a 2x multiple of capital. But with these "mid-life" transactions, the fact is the general partner or the GP has owned these assets for a number of years. It's unlikely that they'll hold it for another five to six years from the point of our entry. 

So we see this as a potentially shorter duration strategy but still underwritten to the same multiple of capital. There is that opportunity to actually potentially get higher IRRs if some of these deals get exited before that typical five or six-year holding period.

Unique characteristics mean unique opportunity

At a time when investors are cautious about the return outlook for traditional public markets, private equity offers important long-term advantages, including strong historical returns and diversification benefits. Find out more.

Managed Fund

Neuberger Berman Global Private Equity Access Fund (AUD)

Alternative Assets

View