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“Just look at that quality!”

Julian Mash, founder and CEO of Vision Capital, is pointing at the glass tumbler I am sipping water from as I prepare my next question about Bormioli Rocco. We are discussing this 188-year-old Italian glassmaker because Vision bought it, in a portfolio transaction with four other businesses, from Banco Populare in 2011. It turns out I am drinking from one of their products.

A family-owned business that manufactures high-quality glassware – including my tumbler but also bottles, jars and, most importantly, pharmaceutical glass and plastic packaging – Bormioli Rocco had become a victim of its own success, falling into the trap of over-leveraging. Eventually its lender, Banco Populare, took ownership pursuant to a restructuring, but after 2008 the bank was focused on shrinking its balance sheet by offloading deadweight like Bormioli Rocco. Meanwhile, business worsened as a dejected management ran the company with little to look forward to besides the day when the bank would finally be ready to sell.

Step in Vision Capital with, appropriately enough, new capital to tidy up the balance sheet, but also the new vision that the quality of the franchise deserved – to stop thinking like a Southern European glassmaker and start thinking like a global manufacturer of precision materials.

“We’ve opened up contacts in China, India and South America for the tableware and pharma products,” says Mash.

The Banco Populare deal harked back a decade, to when Vision pioneered the ‘secondary direct’ approach to mid-market private equity by purchasing portfolios from banks after the dotcom era. It has also helped conglomerates offload non-core businesses and, through the buyout boom, it would buy mature portfolios from GPs so they could return cash to LPs and persuade them to re-up in their new, inevitably bigger, funds.

This was good for GPs, LPs and the businesses themselves. It’s no fun being a mature company in a buyout portfolio that is winding down. You might have plans, but as far as the private equity firm is concerned its programme is complete and it is simply waiting to sell. It is never going to offer new capital – or enthusiasm – for your plans.

“We have $3trn [€2.3bn] of private equity capital out there, but the cost of that capital rises to infinity purely as a function of how long a company has been in a private equity fund,” as Mash puts it. “This has nothing to do with the prospects for the businesses themselves, but with how they are owned.”

Another good example is JDR Cable Systems, a leader in cables for offshore oil and gas bought by BridgePoint Ventures in 2000 on a five-year growth programme. By 2006, it had been through a merger and was ready to capitalise the next phase of organic growth – but as far as BridgePoint was concerned, its role was over. JDR was in a sort of limbo. Sold to Vision, it has not only built on its existing oil and gas business in the UK and Thailand but also invested in a new factory in Hartlepool, increasing production capacity and accessing a whole new market in offshore wind.

“Now we are the market leader in both umbilical cables for offshore gas and offshore wind,” says Mash. “The rational next step for this business was being curtailed simply by how the business was owned: Bridgepoint was horizon-constrained, and we were not.”

Vision Capital is tricky to pigeonhole. Traditional secondaries specialists buy LP interests to solve liquidity or portfolio-construction problems for other LPs, creating value from discounts. Vision buys GP interests and manages them actively, often for many more years. And while the Bormioli Rocco and JDR examples are similar to what other mid-market buyout firms might do in taking a company from a prior owner on to its next stage of growth, the important point is that they were both portfolio transactions.

Vision will usually take on four or five companies at a time, and while it may sell one to the lending bank or an appropriate trade buyer, in general it is picking up mature businesses that offer strategic potential beyond their current stasis. It is a genuine bulk liquidity provider to GPs in the same way as a secondaries firm is a liquidity provider to LPs.

“Hardly anyone is focused on structuring transactions that cater to all three layers – companies, GPs, LPs,” says Mash. “We think we can deliver really special deals this way.”

An innovative transaction with Willis Stein & Partners, finalised last August, takes this idea of providing solutions to every stakeholder to new levels. Twelve years after raising its last fund, the firm was winding down. But some of its partners felt there was more work to do on the three businesses they still held – Education Corporation of America, Strategic Materials and Velocitel. Some LPs needed liquidity, or no longer wished to pay fees on the assets, while understanding that a Willis Stein interest might not command a good price in the LP secondary market; others liked and wanted to retain the assets. The companies themselves simply wanted certainty.

The solution involved a syndicate of Landmark Partners and PineBridge Secondary Partners coming in alongside Vision Capital. The syndicate established a new Vision Capital-led entity that became the lead investor in an extended Willis Stein fund, and LPs were given the option to sell to the syndicate or to remain in the extended fund for a new phase of investment. The Willis Stein partners who wanted to stay on board continue to manage the businesses in partnership with Vision.

“The price of coping with the competing objectives of these transactions by offering this unique combination of options is complexity, which is why not many have been done,” says Mash. “But this could be a model for the new environment.”

An indication that he may be right came in the shape of a similar deal done around the same time by the CAD$166bn (€128.6bn) Canada Pension Plan and Behrman Capital, which created a partnership to buy assets from Behrman’s previous fund and offer a new investment phase for existing LPs who wanted to stay on.

So what is this “new environment” that Mash alludes to? He suggests that the private equity model built up over 25 years of rising markets and falling rates is creaking at the seams. Five years of lacklustre M&A and contracting credit has persuaded many that assurances of quick exits after three to five-year investment programmes may have gone for good. The tangle of the business growth cycle with the private equity fundraising cycle that Vision Capital’s secondary direct approach is designed to unlock will be worse than ever.

“There’s a growing pool of trapped assets and trapped potential,” says Mash. “How many Europeans work for companies that have been held by the same private equity firm for the last five years? How many LPs, 800 metres into a 1000m race, have just been told it’s a 5k? No wonder fundraising volumes are down 80%, even though pension funds need the excess returns that good private equity investments can generate more than ever.”

LPs have always understood the proposition, says Mash. In exchange for long-term commitments and cash flow uncertainty you get a premium above the public market – but now the balance has tipped too far towards cash flow uncertainty to sustain that model. Traditional LP secondaries have a part to play in re-setting that balance for the next generation of private equity endeavour. But Mash is convinced that secondary direct transactions will be even more crucial, and are set to evolve from opportunistic niche to a vital cog in the industry machine.

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