Evercore’s Dawn on rolling over assets, part 1

The financial crisis disrupted the natural investing and harvesting cycle of many funds that were formed prior to 2008, thereby delaying the development of some of the companies GPs had invested in. As these funds come to the end of their term, many still have assets with considerable value that remain unsold, but still have significant upside potential.

What are the typical ways that a GP can create liquidity for their LPs?

ND: There are three main ways. One is they sell their portfolio companies in the ordinary course of business. The second is for the GP to organise a tender offer process, where they present an offer from a secondary investor to their investors and (sometimes) require the new secondary investor to make a new commitment (“Staple”) to a new fund. The third method, which has gained significant momentum over the past few years, is often referred to as an “asset sale or restructuring”, where the assets of a fund are sold into a new special purpose vehicle managed by the incumbent GP. These vehicles typically have a longer term and a revised set of GP economics. The original investors have the option to sell to a new investor or re-invest (“roll-over”) alongside the GP in this new vehicle, generally on similar economic terms. Typically, asset sales generate the highest price for the selling LPs, given the strong alignment between the GP and the new investor and the opportunity for upside in value due to the increased term of the vehicle.

And we are seeing more of these types of deal…

ND: Yes, there has been a huge acceleration in deal flow. GPs have realised they can strategically tap the secondary market to create more value for their LPs by holding and developing certain assets in longer-duration investment vehicles. In certain cases additional ‘follow-on’ capital will be required that is not available in the original fund. The GP has created ‘optionality’ for their LPs by allowing them to sell or “roll-over” into a longer-dated vehicle.

Are LPs comfortable participating in asset sales?

ND: Most LPs are familiar with these transactions and appreciate the choice they provide. Also, LPs will understand an active GP-supported process tends to generate a higher price to the selling LP than a regular “LP-to-LP” because of the enhanced alignment between the GP and the secondary investor. This additional alignment, time and (often) additional capital to support the portfolio is positive in terms of the price to the selling LP.

Nigel Dawn is global head of investment bank Evercore’s private capital advisory business, based in New York. He previously spent 16 years at UBS in London and has experience at Citibank, Booz Allen & Hamilton and Standard Chartered Bank.

Stay tuned for part 2 of this Q&A.

This article is sponsored by Evercore. It appears in the September issue of Private Equity International magazine.