Sir Winston Churchill once opined that a pessimist sees difficulty in every opportunity, whereas an optimist sees the opportunity in every difficulty. As a general partner, one wouldn’t choose to have one’s investors trading interests on the secondaries market. But having recently been through this, I would argue that, provided it’s managed in the right way, it can be a positive experience that unlocks new opportunities for the GP as well as the limited partner.
At Clearbell, we have been through the process twice – and on both occasions it involved the same investor, who acquired and then subsequently sold dollar and sterling interests in our first fund.
On the latter occasion, the investor notified us of their intention in October 2015, when they were still at a very early stage in the process. We were naturally disappointed by the decision, particularly as we had built up strong working and personal relationships with them. As their only UK real estate investment, we found that they were particularly engaged and interested investors. They would often travel the long distance to attend our annual general meetings and had sent staff to spend time with our team.
The investor had benefited from a string of distributions and only missed the tail-end profits of the fund. It was made abundantly clear to us that they were happy with Clearbell and the investment, but that the decision to sell had been triggered by the combination of a change in global investment strategy and their brokers persuading them that a good price could be achieved for their stakes in five separate private equity funds. We were told that without the approach from the broker, they would have held the investment to maturity.
As a first step, we agreed a non-disclosure agreement with the brokers who immediately began to consult us on the investors they would approach. I should say that this was a lengthy process which did not complete until June the following year. It would therefore have been easy to have moved back to focusing solely on other matters and put this to the back of our minds. But we decided to be proactive and maintained a level of communication with the investor and their brokers throughout. This allowed us to keep on top of the process and plan our resources and approach effectively.
When buyers eventually emerged, the three names that were put to us by the broker were groups we knew, which certainly helped. That said, we didn’t want to put a foot wrong during this process and, having come through it, I would offer the following advice to GPs facing similar circumstances:
Firstly, treat prospective investors equally. When one or two prospective investors are more proactively engaged, avoid falling into the trap of providing them with more insight and information. This should ensure that you maintain goodwill across the board. As part of this process, we decided to treat the prospective investors in a similar way to our existing investors so they were kept updated on the deals we worked on, for example.
Secondly, don’t allow existing investors to bear costs. There are a number of costs involved, including legal and tax advice. It’s important to ensure that these are managed and borne by the outgoing and incoming investors.
Thirdly, avoid altering fund structures. The incoming investor needs to step into the shoes of the outgoing investor. We were clear that we would not go back to our existing investors and request their agreement to a change unless absolutely necessary.
Finally, steer clear of the commercial. As the GP, your role is to provide investors with a good service, but avoid getting caught up in negotiations about pricing. We were particularly careful on this count as we felt it could have been a minefield.
It is possible that the growing popularity of secondaries trading platforms could take the personal element out of this process over time. But our experience was far from an impersonal one – it was steeped in relationships and trust built up gradually over time. Were we to go through it again, I’m optimistic that it would be an opportunity to open up new relationships, and hopefully bid à la prochaine to old friends on cordial terms.
This article first appeared in sister publication PERE‘s Secondaries supplement.