Single-asset CVs
A unique opportunity for private equity investors
The growing appeal of single-asset CVs
Single-asset CVs have gained strong momentum over the past five years. They are a compelling alternative exit option for a GP holding a trophy asset with a proven value creation plan that has several years of runway left. Ideal single-asset CV businesses have often generated a 2-3x return during a GP’s initial hold period, making it logical that the GPs and LPs would want to crystallize such gains. New secondary investors can cherry pick from these de-risked assets, providing for a compelling risk-adjusted return profile versus that of traditional mid-market and large-cap private equity investments.
Attractive market dynamics
Single-asset GP-led transactions have increased their share of total GP-led volumes from less than 10% in 2018 to nearly half of all GP-led transactions over the last three years.
Demand for capital in the GP-led market currently exceeds supply, creating favourable market dynamics for buyers. Annual deal volumes increased significantly between 2018 and 2022, outpacing dedicated fundraising, as depicted below.
Considerations when investing in a single-asset CV
Below are some of the fundamental elements that AltEx considers prior to investing in any single-asset CV:
GP rational, i.e., why is the GP pursuing a CV?
A GP may choose to pursue a CV for several different reasons. While some are looking to maintain control of their best-performing trophy assets, others may be seeking more time to execute a turn-around or for the underlying business to implement a new strategy. Ultimately, a quality CV is always one that contains a trophy asset(s), and where the GP’s underlying motivation is to extend its hold period to execute on future growth opportunities and fulfill the ultimate potential of the underlying company.
GP and company management alignment
For complete alignment, it is our expectation that the GP roll 100 percent of its carried interest and committed capital into the newly formed CV. In addition, the management team of the underlying asset is expected to roll a majority of their proceeds from the transaction into the CV. It is important for the senior leadership team to be aligned with the new CV investors.
Company quality
AltEx targets businesses in thriving industries where the GP has successfully executed on its original investment thesis and where the business continues to exhibit strong growth prospects with high-quality revenue and attractive free cashflow characteristics.
Industry quality
AltEx is specifically focused on essential service industries that grow at nominal GDP or higher, with limited cyclicality, and that operate in highly fragmented markets with attractive M&A opportunities. We are looking for industries that offer compelling opportunities for growth both organically and inorganically.
GP quality
Partner with proven private equity firms with successful long-term track records.
How does AltEx succeed in the single-asset CV market?
We begin by focusing on middle-market companies with $50 million to $150 million of EBITDA. We believe this size of business provides the right balance between being large enough to have a resilient business model, but not too large to inhibit options at exit.
We then apply a thorough screening process to ensure that the investment meets our criteria for GP/management alignment, company quality, industry quality and GP quality.
Finally, we work to ensure that each transaction includes the following key ingredients for a successful AltEx investment:
Multiple ways to win
The company must have multiple levers to generate returns: Free Cash Flow, Growth, and M&A opportunities. While we do not assume any valuation multiple expansion at exit in our base case assumptions, we always seek opportunities with an idiosyncratic path to achieving multiple expansion over time.
Disciplined approach to valuation and leverage
Appropriate entry valuation and avoiding excessive leverage are critically important to the success of each deal. We apply a bottoms-up valuation methodology to all of our prospective investments.
Continuation of a proven value creation strategy
We look for assets that are “true” continuation opportunities. (No resets or restarts). GPs must demonstrate that the underlying fundamentals of the value creation roadmap can be extended.
A unique opportunity
We believe that single-asset CVs offer investors a compelling opportunity to invest in some of the best companies owned by private equity firms today. Attractive CVs offer a distinctive blend of exceptional company caliber, robust GP alignment, proven growth, and what is likely to be a relatively shorter hold period to that of traditional LP commitments to private equity funds. As the CV market evolves, we remain focused on opportunities that match our investment criteria for success, ensuring our investors gain access to a diversified portfolio of high-quality assets.