Do ‘toe-hold’ primary positions still give buyers the edge?

Being a source of primary capital to the underlying GP can help you win a secondaries deal – as long as your competitors haven't had the same idea.

What do Ardian, Coller Capital, Intermediate Capital Group, Landmark, Lexington, Partners Group, Strategic Partners and Pantheon all have in common? They’re all primary investors in BC Partners’ latest fund.

If this comes as a surprise, it shouldn’t. In an age when having an edge can be key to winning deals, secondaries firms are keen to differentiate themselves from the pack. With primary “toe-hold” commitments of as little as $1 million, secondaries firms can build valuable relationships with GPs and create leads for opportunities, as we wrote in an editorial last September. Importantly when a process begins, they will have an informational advantage and will likely be ahead of the due diligence curve. The have also proved to the GP that they are a viable source of primary capital.

BC Partners’ latest fund is an example of just that. The London-headquartered firm, one of Europe’s biggest and most established private equity managers, wants to tap the secondaries market to boost fundraising for its 10th flagship fund, as we reported on Thursday. To do so the buyout house has hired Campbell Lutyens to run a stapled deal on its predecessor vehicle, and a tender offer process will be put to LPs in that fund over the summer.

It’s still early days; the process launched in May and secondaries buyers are yet to formulate bids. How useful it would be for the bidders to have an existing relationship with the GP, one might wonder.

The eight firms mentioned above have just this – they all made commitments to the fund as early as July last year, according to publicly available documents. The commitment amounts vary from as little as €3 million to as much as €277 million, the documents show.

The disparity between the apparent size of the “toe-hold” is interesting. What we don’t know is whether a €277 million ticket buys preferential terms in a side letter – such as rights of first refusal on any secondaries purchase – that don’t go to the €3 million LP.

It’s unlikely that any of these firms knew back then that BC Partners would run a tender offer on its 2011-vintage BC European Capital IX a year later. But Secondaries Investor understands that several of these firms have been identified as candidate buyers in the staple process – perhaps unsurprisingly given the calibre of investors. For those firms, making a primary commitment to BC X has turned out to be either an extraordinary piece of luck or an incredibly smart investment.

BC IX, which was the 51st most in-demand fund globally over the last year according to Palico, has some sizeable LP commitments: at least six investors made commitments larger than $100 million to the fund, including Washington State Investment Board with $240 million, Canada Pension Plan Investment Board’s C$350 million ($259 million; €231 million) and California State Teachers’ Retirement System’s $282 million, according to PEI data.

Any of these pensions parting with even half their stakes would be more than enough to get these secondaries firms out of bed.

The problem, of course, is that in this deal they all have an edge, and when everyone has an edge that levels the playing field. Making a primary commitment so you’re a GP’s first port of call when one of their existing LPs needs liquidity is a great idea. If seven other firms have exactly the same idea, it becomes more about buying your seat at the table rather than holding all the aces.

Will the stakes simply go to the highest bidder? Or will there be some other element that differentiates the winner or winners from the pack? We’ll be watching this deal with keen interest.

Does having an edge really matter or is it just about paying the highest price? Let us know your view: or @adamtuyenle

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