Swiss interdealer broker Tradition has poached a team from professional services group Duff & Phelps to build a new private markets business, as it looks to profit from a possible wave of fund restructurings amid tough economic conditions.

The Swiss-listed firm has hired managing director Dan Nolan, William Arnold and Maulik Patel as well as New York-based John Corley from Duff & Phelps’s secondary markets advisory unit for its new venture.

Tradition hopes to win business helping to restructure private equity funds whose portfolio companies run into financial trouble as economies struggle to rebound from the impact of the coronavirus pandemic. That may mean funds have to find ways to buy themselves more time to turn around firms in trouble, while also allowing investors who are desperate for their cash back to exit.

The firm, which specialises in broking over-the-counter financial and commodity products such as interest rate and natural gas derivatives, plans to build the private markets unit to about 15 people across London, Asia and the US by the middle of next year.

Secondary markets brokers help match investors wanting to get out of an illiquid private equity, real estate or hedge fund early with investors wanting to put money in. In the wake of the financial crisis the secondary market became an important way for some investors to access their cash locked up in illiquid funds, albeit at deep discounts.

Secondary market brokers can also help fund managers to restructure their funds, for instance by extending the life of a fund, creating new vehicles, running auctions to let investors sell their stakes or liquidating the portfolio.

Tradition’s move comes after a decade of expansion in the private equity industry. Funds have been snapping up companies in sectors such as hospitality, travel and retail, which are now among the most exposed to the economic damage caused by coronavirus. Private equity-backed buyout volumes have grown steadily to close to $500bn last year, according to Refinitiv.

Mr Nolan, who is now head of Tradition’s new private markets division, said some investors could face a cash shortfall as private equity funds find it harder to distribute cash because the companies they own are now performing poorly. This could persuade funds to restructure, for instance by creating vehicles to hold problem assets so they do not need to be sold immediately. This is a practice known as side-pocketing which was used by some hedge funds holding illiquid assets during the financial crisis.

“This will allow managers to inject additional capital into these assets over a longer timeframe without impacting the performance of the main fund,” said Mr Nolan, who has previously worked with Messrs Patel and Arnold at broker Tullett Prebon.

Source: Financial Times

Can’t stop reading? Read more