Liquidity and retention of shareholder value

18th February 2020

17Capital is a leading provider of finance and liquidity to the private equity industry. Here we discuss the liquidity options currently available for managers, new market developments and the benefits of a recapitalisation with 17Capital.

The global private equity industry has outperformed liquid public markets by 750bps over the last 20 years1. From 2011 to 2015 the trend of net distributions to limited partners increased significantly as pre-crisis funds recovered, and capital call facilities gained popularity. However, since 2015, net distributions to investors actually decreased by ~65%2.

By using this finance, you can invest 100 percent of a fund, which gives the GP an advantage

As the pace of distributions decrease and investors once again become fully allocated to the asset class, investor liquidity has gained even more focus on which managers are being benchmarked. Meanwhile, in a competitive market, managers can find it challenging to source new investments which are as compelling as the assets they are selling. While asset sales and company dividend recaps have remained the main source of investor liquidity, the secondary market has provided additional tools. Managers now have options to hold assets longer through innovations like continuation funds, strip sales, partial exits and single asset funds. However, a portfolio-level dividend recap with 17Capital is an alternative to the secondary options with some specific benefits.

Cambridge Associates Private Investments Database
Bain & Company – Global Private Equity Report 2019

Dividend recapitalisations

Although not exhaustive, we highlight three key advantages of a dividend recapitalisation:

Maximise value creation

Historically managers have sold outperforming assets early in a fund’s life to generate liquidity for limited partners, whilst carrying the less performing assets until final maturity. However, a dividend recapitalisation allows a manager to capitalise on the outperformance, send early distributions to investors while holding onto outperforming assets in order to maximise the multiple on invested capital.

Valuation agreement

Executing a secondary transaction of any kind requires a valuation of the portfolio to be agreed by multiple parties with divergent interests and finding a fair market price can generate a perceived conflict of interest. In a dividend recapitalisation, the existing limited partners retain the full portfolio upside. As such, there is no sale or reallocation of the portfolio’s equity upside and the valuation of the assets becomes less impactful.

GP/LP Alignment

Investors choose to invest with managers in which they have strong conviction. It is an important relationship in which the investor relies upon the manager’s expertise to maximise the return on their capital. If the manager is convinced that an asset has greater upside potential than a strategic or financial buyer is willing to pay, their existing investor should benefit from that insight and upside. In a dividend recapitalisation the manager creates more time to fully realise their portfolio’s potential and maintains the alignment with their investor that was in place at the inception of the fund.

Generating liquidity

17Capital: A different approach

Finding new Investment opportunities and generating liquidity remain some of the key challenges faced by private equity managers. The secondary market has provided additional tools but aligning all stakeholders in these transactions can be challenging.

At 17Capital, our focus is on providing non-dilutive financing, whereby managers can generate liquidity from their portfolios whilst avoiding some of the conflicts of Interests of secondary transactions. Discrete fund or portfolio subset recaps is a trend gaining traction in the industry. 17Capital provides both highly flexible as well as competitively priced long-term NAV based facilities, without the need to be backed by uncalled capital.

The financing allows managers to satisfy the liquidity requirement of its Investors, gain time to maximise returns on the best performing assets and partially lock-in unrealised gains, whilst keeping the alignment between stakeholders the same as agreed at the close of the fund.

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