Buyers call for more skin in GP-led game – Campbell Lutyens report

Buyers are requesting a bigger GP stake in continuation vehicles and cross-fund investments are on the rise, according to the advisor.

Buyers are demanding closer alignment with general partners when it comes to continuation fund deals, according to data seen by Secondaries Investor.

One third of buyers reported an average GP commitment of greater than 5 percent of total transaction size in deals in 2020, according to a full-year survey by advisor Campbell Lutyens. The average previously has been 1-2 percent, according to New York-based partner Gerald Cooper.

Nearly 25 percent of respondents said that more than one quarter of the GP-led transactions they completed last year included a cross-fund investment from the GP’s latest flagship fund.

“If the secondary investment goes poorly and has the potential to negatively impact the GP’s flagship fund return, it’s a pretty powerful alignment tool,” said Cooper.

The survey found that GP-led deals accounted for 40 percent of transaction volume last year, or $23.9 billion. Almost 60 percent of GP-led deals priced at between par and a 5 percent premium to net asset value, while 36 percent of LP sales traded at a discount of 10-15 percent.

“You are getting more information when a GP is party to a transaction so you are able to build stronger conviction around your due diligence, which results in better pricing,” according to Cooper.

The trend towards buyers requiring more skin in the game is balanced out by GPs calling for increasingly favourable economics in continuation vehicles, market sources told Secondaries Investor.

“For single-asset vehicles, the profit share is typically around 10 percent with an IRR hurdle of 8 percent. The next carry hurdle usually occurs around 15 percent carry, but that IRR hurdle on average has come in to 13 percent,” said one senior New York-based buyer.

Campbell Lutyens’ survey was based on data from at least 65 respondents. The advisory firm and placement agent will publish the full findings in the coming weeks.