• Primaries and secondaries-focused firm unveils US-centric direct investment and GP stakes initiatives
• New investment strategies expected to push the USD 550m AUM firm over the USD 1bn mark by year-end
• Niche private equity opportunities and secondaries are key to value creation

Paris-headquartered Mantra Investment Partners, known for investing in non-conventional private equity (PE) opportunities via primaries and secondaries, will begin deploying capital into direct investments and stakes in lower and middle market private equity firms, Chief Investment Officer Antoine Dréan told Mergermarket.

Founded in 2007 and with USD 550m in assets under management (AUM), the firm has delivered investors an unlevered net IRR of 25.1% over the past 17 years by targeting niche private equity opportunities and using little to no debt, said Dréan. Mantra has yet to make any investments via its new direct investment or GP stakes strategies, but currently has one direct investment in the works and several GP stakes deals set for later this year, said Dréan.

The private equity investor, with additional offices in Luxembourg and New York, is also currently raising its third primaries strategy and fourth secondaries strategy. Both are “very close” to reaching first closes, Dréan noted, likely in June. Both have targets of USD/EUR 250m (Mantra’s primary funds invest in dollars and its secondary funds invest in euros).

Rooted in disruption

Dréan’s PE career began as early as 1992 when he founded Triago, one of the market’s first private equity placement agents – the sale of which to Houlihan Lokey [NYSE:HLI] was finalized last month, with the Triago team expanding the investment bank’s Private Funds Group. He also founded Palico, a digital secondary marketplace that facilitates the buying and selling of stakes in private capital funds. By the time Mantra was launched in the mid-2000s, “my feeling was that there was too much money in the asset class and that it was becoming very difficult to generate the kind of returns that were the norm in the early ’90s,” said Dréan.

“When I started, the beauty of the asset class was that it was definitely not correlated to anything and that leverage was not used as much,” he said. The higher cost of capital in today’s environment has raised questions about the ongoing sustainability of private equity returns. Meanwhile, niche funds have continued to deliver near 30% returns, he said.

Mantra seeks out “specialized” PE opportunities for its primary fund strategy, selecting funds in sectors uncorrelated to broader economic trends, such as litigation finance, digital infrastructure and agribusiness. It also targets small to mid-market secondary transactions similarly unanchored to mainstream markets.

These types of investments still tend to perform in periods of market volatility when debt-fuelled deals are less impactful, Dréan explained, eliminating the need to take on additional risk by piling on leverage.  “We love special situations and anomalies, and you find more of those things when things are not going very well,” he said. “Of course, leverage means more return when things go right, but it means less when things go wrong.”

The firm refers to its primaries strategy as “structured primaries” – “because we love to get into new funds with some kind of angle,” said Dréan. Mantra continuously monitors the PE landscape for under-the-radar opportunities, primarily in the US where niche PE managers have longer track records. Mantra’s flagship primaries strategies, Mantra Primary Opportunities I and II, invested in a total of 10 funds each – all based in the US with the exception of one fund in MPO II.

Dréan predicts that MPO II will hold a total of 15 funds, which will also be mostly, if not all, concentrated in the US. “Usually, the funds we look at on the primary side are between USD 100m and USD 500m in size. Some would call that extra small I guess, but this is where the returns are right now,” he added. “Of course we talk to [placement] agents, but most of the time we find stuff ourselves.”

“We also do what we call ‘situational secondaries,” said Dréan. “And by that we mean that we look for special situations only, namely distressed sellers.” Mantra’s secondary transactions typically range up to USD 75m, with no minimum deal size or geographical requirements.

Roughly 45% of investments are based in the US, said Dréan, with around 35% in Europe and the remainder in Asia. Identifying opportunities off the beaten path has remained integral to Mantra’s strategy as the urgent need for liquidity leads more mid-market sponsors to embrace secondaries.

The secondary market recorded USD 109bn in transaction volume in 2023, according to Lazard, second only to the USD 126bn seen in 2021, as high interest rates continue to mute M&A and IPO activity and sponsors seek alternative exit routes. PJT Park Hill projects that global secondaries volume will rise from USD 115bn to USD 191bn over the next five years, with GP-led share poised to rise from 42% to 53%.

GP stakes and direct investments: the next frontier

The GP stakes and direct investments buckets, which Mantra plans to grow to the same size as its primaries and secondaries strategies, are targeting similarly niche corners of the market. The firm aims to build a diverse portfolio of small GP stakes in up-and-coming managers, ranging in value from around USD 1m to USD 15m apiece. “We have about 1500 dots on our radar screen,” said Dréan. “I would guess that 80% are in North America… this is going to be a US sport.”

Mantra will hire more investment staff in New York to power the US GP stakes drive, he added. The remainder of the strategy will be concentrated mostly in Europe, with a few stakes in Asia.

GP stakes have become a fiercely competitive game over the past decade with the emergence of specialist shops like Goldman Sachs’ Petershill Partners [LON:PHLL], Blue Owl Capital [NYSE:OWL] and Hunter Point Capital. Blackstone‘s [NYSE:BX] decision in February to merge its GP stakes and secondaries units indicated that the private equity behemoth has big plans for the non-traditional strategies that have historically been overshadowed by leveraged buyouts.

On the middle and lower end of the market, however, said Dréan, “it’s like a desert…especially in our space.” “When you look at the lower end of the market, it’s really an art,” he added. “It’s finding the talent, finding the right niche, the right strategy, the area where competition is low among GPs, and the area where you can make very good returns without using leverage.”

As for direct investments, Mantra intends to allocate funds “mostly via SPVs [special purpose vehicles]” alongside many of its existing GPs.

The road to USD 2bn

For the first time in its history, said Dréan, Mantra is beginning to receive interest from large institutional investors eager to get involved in niche funds and secondaries. The only problem, he stipulated, is that many of those investors’ minimum ticket sizes fall as high as between USD 100m and USD 200m – far larger than the firm can currently take on.

The latest fundraising efforts across primaries and secondaries are designed to propel Mantra past the USD 1bn mark in assets under management by the end of the year, said Dréan. Factor in the new GP stakes and direct investments allocations, and he envisions that the firm could eventually double that to accommodate larger investors.

“With a combination of funds and strategic managed accounts, probably in the second part of this year, we will be able to reach a few billion pretty quickly.” AUM notwithstanding, Matra’s strategy will remain the same.

“We’re not going to have more money to do different deals,” he said. “We’re going to have more money to do [nearly] the same ones.”