There’s a significant gap between GPs’ and investors’ respective priorities and concerns when it comes to GP-led transactions, new research has found.
The number of GP-led transactions that LPs are reviewing has increased sharply this year, according to the survey conducted by Mizuho Financial Group-owned placement agent Capstone Partners. Around half of LPs surveyed said they reviewed more than 10 transactions in the first half of this year. By comparison, across the whole of 2021, 67 percent of LPs reviewed fewer than 10 transactions. Just 19 percent of LPs have a dedicated secondaries team, with the majority (58 percent) indicating secondaries were done by their primary teams.
For investors, no carry rollover was seen as the biggest red flag in GP-led transactions, with the majority saying reinvestment of carry was the number one priority with the launch of a GP-led process. Misalignment and a lack of motivation, or the wrong motivation, were further red flags, according to the survey of 110 global participants, including GPs and LPs.
By comparison, just 7 percent of GP respondents cited no carry rollover as a red flag. While in the minority, 28 percent of GPs signalled they are unwilling to substantially roll over the carry. GPs’ assumptions of LPs’ largest red flags were no competitive pricing, conflicts of interest and misalignment.
Answers also differed for the main challenges GP face in such transactions: GP respondents said the biggest obstacle they face is conflicts of interest, followed by coordinating different shareholders and the challenges in dealing with LPACs and existing LP management.
LPs listed dealing with LPACs and existing management as a perceived top challenge for GPs. Fifteen percent of LPs said a challenge for GPs was that GP-leds can be a distraction, while no GP respondents gave that response.
More than one-third of LPs surveyed said they anticipated that GP-led transactions would have a negative impact on future fundraising, with just 9 percent indicating they expected such transactions to have a positive impact. No GPs indicated GP-leds would have a negative impact on fundraising.
Such findings speak to the evolution of the GP-led secondaries market, Steve Standbridge, managing partner and president of Capstone, told Secondaries Investor.
“GPs assume that the first thing that LPs are going to worry about is valuation and this concept of conflict that they’re trying to pull the wool over their eyes,” Standbridge said.
LPs view these transactions from a different angle. While getting the highest valuation is important from a fiduciary perspective, they get “comfort if they know that the GP is all in, that they’re rolling their carry, that they may be rolling their investment”. LPs that are selling will “put a little bit more scrutiny on it, but if they see GPs participating and rolling carry, their belief is that they’re probably getting a fair valuation”.
As the market continues to grow, Standbridge anticipates structures will become more standardised, supported by strong alignment. With LPs squeezed by the denominator effect and other exit options looking less attractive, Standbridge suggests LPs could become a little more forgiving when given the opportunity to sell out of an asset via a continuation fund transaction.
GP liquidity solutions made up 51 percent of overall market share in the first half, down from around 60 percent across the same period in 2021, according to Evercore’s first-half report. The adviser estimates secondaries transaction volume in the first six months of this year amounted to approximately $53 billion – around 11 percent higher than H1 2021. Single-asset GP liquidity solutions captured 25 percent of the market.
Market participants expect a cooling on 2021’s record year for secondaries transaction volume, which Evercore pegged at $134 billion. Buyers are practising caution, opting to transact on high-quality deals amid market volatility. Scarce LP resources have also driven a flight to quality, Capstone’s report notes.