GP-led restructurings price on a fine line

For a manager seeking to restructure a fund, pricing is critical to the success of a secondaries deal.

“The difference between 89.5 percent of NAV [net asset value] and 90 can be very material,” said Greenhill Cogent managing director Brian Mooney. “If the pricing is above 90 percent of NAV we see a much higher level of support from existing LPs than if it’s below.”

Speaking in London at the book launch of “Private Fund Restructuring” published by PEI and hosted by Citco, Mooney added that “getting that pricing view upfront is critical in terms of generating future support from LPs and having buyers that want to spend time on the deal. The valuation upfront is a critical test to make sure everyone is spending their resources appropriately.”

Mooney said he expected the GP-led fund restructuring segment of the secondaries market to continue to grow this year.

“Based on the discussions we have with GPs, we think this is a longer term trend, where over some reasonably short time horizon, we expect to see GPs generating liquidity options for their LPs on a regular basis.”

Of the $40 billion of secondaries transactions last year, 20 percent were GP-driven transactions including restructurings, recapitalisations and liquidity options offered to investors, according to Greenhill Cogent data published in May.

The market for secondaries transactions hit a record high of $42 billion in 2014, of which $8.2 billion were GP-led deals, compared with $7.4 billion in 2015, according to Greenhill Cogent data. Total secondaries deal volume in 2015 was impacted by fewer sales of $1 billion or more in size. Greenhill predicted in a January research note that this year annual secondaries market volume will settle into a $35 billion to $45 billion band.

17Capital co-founder and managing partner Augustin Duhamel, speaking at the launch, noted that “GPs are becoming more proactive in managing their liquidity, going to LPs to offer, rather than being reactive when LPs come to them when they want to sell.”

Duhamel said that he expected that in future GPs will “integrate liquidity management into their offering. Those transactions, more and more are not so much to solve a difficult situation but to give some optionality to investors.”

GP-led restructurings are increasingly part of “the service” and a way to provide options to LPs that they are not obliged to take, Duhamel said.

A key change in the market has been that firms with “healthy franchises” are now initiating secondaries transactions, said Kirkland & Ellis partner Michael Belsley. “Now stronger franchises are seeing it as a benefit.”