GP-led restructurings are more viable

GP-led restructuring transactions have become more acceptable for buyers and are expected to be a growing trend over the next few months, according to Credit Suisse private fund group director Mark McDonald.

Has Credit Suisse seen deal flow in the secondaries market increase over the last year?

Our team has seen a significant increase in deal flow as many LPs continue to take a more strategic view in actively managing their PE exposure – obviously helped by the continued strong pricing for fund positions. Alongside this growth, interest from GPs and buyers in GP-led secondaries transactions continues to grow and is providing a rich seam of deal opportunities. Our team has advised on 17 GP-led secondary processes alone over the past 12 months. We are also seeing more diversity in the types of deal flow, with sales of infrastructure, real estate, credit and even shipping assets increasing their share of the overall market. That’s one of the factors that could make 2014 a record year for the secondaries market. We estimate deal flow is on track to total over $28 billion for 2014.

Could you describe a few reasons how the rise in GP-led processes benefits both GPs and LPs? What are the challenges with such situations?

Since 2012, Credit Suisse estimates that over 30 GP-led restructuring transactions have been or will be brought to market. While it is difficult to estimate exactly how many of those transactions will be completed successfully, Credit Suisse believes only a small minority have failed to close. In executing these transactions GPs and LPs grapple with questions around legal, economic and fiduciary duty, while attempting to address alignment of interest concerns. For such processes to be successful, we believe there must be a strong investment case for the remaining assets in the fund and a credible team at the GP. There must also be a desire by a significant number of existing investors to restrict fund extensions or limit support capital for the portfolio, thus implying an interest in liquidity.

Are stapled transactions increasing in line with the growth in secondaries volumes?

If you look back to the market in 2009 to 2011, stapled transactions were very difficult to execute. This was a result of volume and pricing of traditional LP interests in the secondary market creating a high opportunity cost for more complex situations and a generally more challenging fundraising environment. In the current market, stapled deals are more acceptable to buyers and are certainly getting done – but again the ability and size of any staple is highly dependent on perceived GP quality, the attractiveness of the underlying secondary asset pool and the historical ability of the GP to deploy blind pool capital. In addition buyers look for a credible near-term pipeline of investment opportunities to preserve IRR. An interesting recent trend is for GPs to use the secondary market to raise stapled capital as part of a wider primary fundraise. This is a trend which we certainly expect to increase over the next few months.