Andrew Hawkins, global head of secondaries at Intermediate Capital Group, recently sat down with Secondaries Investor for a Q&A on fund restructurings. The full interview appears the book Private Fund Restructuring: An introduction to the key structures, transaction types and negotiation points for GPs and LPs, published by Private Equity International in December. Below is an edited extract.
There are four essential ingredients to a successful fund restructuring, outside of the obvious requirement for capital.
1. The assets. A restructuring is more likely to be successful where the bulk of the underlying portfolio companies are of good quality, generating cash and growing. Portfolios with problematic histories and dynamics are not likely to lead to good transactions.
2. The GP. These are true partnership transactions where we, as buyer, are providing the capital to enable the incumbent GP to make an management buyout of its own portfolio. In return, we seek to build partnerships with appropriate governance features to enhance the upside potential and to help provide downside protection. Many GPs welcome additional insight and support while others do not.
3. Valuation. What we do is fundamental buyout-like diligence on all the assets and make our own judgements about what they are worth. From the ground up, we evaluate the securities that the fund owns and this, of course, will relate in some way to NAV. If the discount is too large, it is unlikely that many LPs will sell and so the transaction becomes too small to be viable.
4. Communication. The importance of early and transparent discussion with the LPs in one of these transactions is hard to overstate. There are frequently tensions and stresses between the GP and its LPs in these situations. Regular dialogue between the buyer and the LPs, and between the independent advisor and the LPs is essential to ensure a viable deal. If trust has broken down between the GP and its LPs, it is more difficult to catalyse win-win solutions.