Novel transaction structures and deal types were a key trend in law firms’ secondaries work last year, according to Secondaries Investor‘s latest annual survey.
Almost all of the firms that responded to the survey said they worked on single-asset fund restructurings, strip sales and preferred equity deals last year. In total, the nine firms advised on $84.6 billion of deal volume – defined by purchase price plus unfunded commitments – that closed in the 2018 calendar year.
“Transaction structures continue to evolve as market participants become more comfortable with the secondary demand available and the willingness of buyers to accommodate unusual structuring and timing demands from sellers and GPs,” said Gabriel Boghossian, a partner at Stephenson Harwood in London.
Stephenson Harwood, which is run by two partners, advised on around $2 billion-worth of deals including single-asset restructurings, strip sales and GP interest stakes.
Kirkland & Ellis advised on 22 preferred equity deals worth more than $4 billion in total, as well as three single-asset restructurings. New structures the firm saw last year included simultaneous GP-minority stake sales and GP-preferred equity investments, as well as Chinese RMB-denominated fund recapitalisations.
The firm’s secondaries unit, led by Ted Cardos, advised on the highest amount of deals by dollar value at $31 billion. It worked on at least 20 GP-led fund restructurings and three stapled tender offers during the year.
Proskauer Rose, which advised on $14.2 billion, worked on six strip sales and four deals involving preferred equity. The market was “extremely busy” last year, the firm noted.
“Strip sales and single-asset secondaries have become very popular as managers try to provide liquidity to LPs in older funds,” Proskauer noted. The majority of its deals by value – 84 percent – were traditional fund stake transactions.
Akin Gump Strauss Hauer & Feld said it used a multi-party merger structure in the restructuring of five real estate funds for a US manager. Real estate GP-led deals pose unique tax and other issues not as prevalent in private equity, and the structure allowed the client to to address unique real estate and tax considerations, the firm noted.
Its approximately $2 billion-worth of deals included two single-asset restructurings and one preferred equity deal, and was split roughly 40/60 between GP-leds and LP portfolios.
Debevoise & Plimpton advised on around $8.4 billion across 104 transactions, mainly in private equity.
“One interesting aspect of the market has been the number of continuation funds being set-up to hold a single asset, or sometimes several assets,” said partner Katherine Ashton. “We’ve also seen a lot of interest in new deal structures involving preferred equity or other debt instruments. That’s something we feel will be a growing area of the secondaries market.”
Morgan, Lewis & Bockius said leverage, including third-party credit arrangements and deferred payments, was on the rise. The firm advised on around $13 billion-worth of deals last year with a 70/30 split between LP fund stakes and GP-led deals.
Ropes & Gray‘s $7.2 billion worth of deals were split 70/30 between fund stakes and GP-leds across 145 deals. The makeup of sellers utilising the secondaries market also evolved last year, according to partner Isabel Dische.
“A growing number of corporates have been participating in secondaries transactions,” Dische said, adding that her firm has helped several biotechnology companies rebalance their private holdings.
On the buyside, many of the firm’s sovereign wealth fund clients have built up dedicated secondaries teams and are buying directly as well as teaming up with traditional secondaries buyers, Dische added.
MJ Hudson said it advised on $2.1 billion across 47 deals. This included five single-asset restructurings, four strip sales and 12 deals involving preferred equity/GP-interest stakes.
Partner Eamon Devlin said the use of credit lines made secondaries deals more complex to close last year.
“If there’s leverage in place, there’s an extra layer of due diligence to be done by the acquirer,” he said. The leverage provider’s consent may be needed to allow changes in the lending facility structure, he added. “It’s an extra layer of finance which wasn’t there in PE fund structures 10 years ago.”
Gibson Dunn & Crutcher worked on two single-asset deals, four strip sales and four preferred equity deals. Its $4.7 billion worth of transactions comprised 40 percent GP-led deals, including a package of energy infrastructure investments sold by General Electric to Apollo Global Management in a synthetic secondaries deal.
“GP-led recaps have accelerated to the point of becoming normal,” said Edward Sopher, a partner at the firm. “This takes space from other types of transactions [such as] regular asset sale processes, although regular way secondary portfolio sales continue.”
Firms including Fried Frank, Goodwin Procter, Macfarlanes, O’Melveney & Meyers and Weil, Gotshal & Manges either declined to participate or did not respond to requests for information.