Getting to the right price is perhaps trickier on a GP-led deal than on other types of PE transaction. The sponsor manages both the selling vehicle and the continuation vehicle, creating an inherent conflict. This makes it imperative that buyer, sponsor and LPs are all happy with the price, or at least consider it to be fair.
Price setting can happen in different ways: for example, buyers can formulate bids based purely on their own due diligence. If an asset was priced through an M&A process that fell through, the adviser might use that valuation as an anchor for the secondaries process. The price is often verified by a third-party valuations firm to ensure it falls within a range of fairness – something the US Securities and Exchange Commission wants to make mandatory.
A relatively new, growing trend is for the price of continuation fund deals to be set by the sale of a minority stake. A recent example of note is Clayton, Dubilier & Rice’s $4 billion process on glass repair business Belron, which was priced based on the sale of a 39 percent stake to a group led by Hellman & Friedman in the first half of last year. Lazard was the secondaries adviser. Some buyers opt out of these deals, as they effectively turn the secondaries firm into a price taker. Yet having a market-tested price does bring peace of mind.
“If it’s a respected sponsor, you can assume they’re underwriting relatively consistently with what a buyout manager would underwrite, which is in line with what most single-asset secondary transactions are projected to achieve as well,” says Derek Snyder, a partner with AltamarCAM Partners. It’s important that the buyer of the stake is investing out of a new vehicle, not using up leftover capital from an old one, he adds.
Some buyout managers are raising or allocating capital specifically to acquire minority stakes that will be used to set the pricing of continuation funds, says Tony Colarusso, global head of private capital advisory at Morgan Stanley. These funds can help larger deals get done as they reduce the amount to be underwritten by secondaries funds, which are constrained by concentration limits.
Tougher balancing act
Finding the right price is trickier today than it was a year ago. Public stocks have declined, with the S&P 500 falling nearly 4 percent in the first half. Secondaries buyers want that reflected in pricing. Sponsors have kept their valuations relatively flat, however. Business fundamentals remain strong – so why write down assets just because of the vagaries of the stock market?
It is difficult for sponsors to justify doing a GP-led deal at a discount to the holding value of the assets. It is equally difficult for secondaries buyers to justify transacting at par or better in a down market. This has led to an impasse, which most believe to be temporary.
“A lot of deals [being launched] are smaller, and I think they have a better chance of getting done,” Harold Hope, global head of secondaries investing with Goldman Sachs Asset Management, says. “Our own house view is bearish on the rest of 2022 for continuation vehicle volumes. I think we are pretty bullish on 2023. We feel like when things normalise a bit, there will be a lot to do.”
For secondaries advisers, the challenge is finding the right assets at a price that can compel buyers to open their chequebooks. Lea Lazaric Calvert, head of Evercore’s European private capital advisory business, says this means seeking out businesses with low raw material costs and the ability to absorb inflationary pressures.
“I don’t think dealflow has dried up, but there is a mismatch in valuation expectations between buyers and sellers,” she says.