When I first began reporting on the secondaries market half a decade ago, the GP-led strategy was a fledgling corner of a $40 billion market. Fund restructurings were reserved for “zombie” managers and dedicated restructurings funds were a novel idea.
Fast forward to January this year and the GP-led market had become a staple of the overall secondaries market. Household names such as Blackstone, Bain Capital and Warburg Pincus have run processes on their funds. Individuals at secondaries firms have quit their jobs to set up their own shops, while even GP-led buyside sceptics have been rumoured to be mulling an about turn.
Indeed, veteran secondaries market participants had so much faith in the GP-led sector that at least one of them predicted such processes would overtake LP sales by proportion of deals as early as next year.
How quickly things can change. Sources we spoke to this week – all of whom were working from home due to restrictions on movement amid the covid-19 crisis – confirmed deals are on pause and the market is essentially dead.
“Industry activity is virtually non-existent for the time being – everyone [has] slammed on the brakes,” says one New York-based buyer who focuses on complex deals.
Even prior to the outbreak of the novel coronavirus, the GP-led market faced potential headwinds, as we explored this week. Rollover co-investments, fund-to-fund transactions and long-hold funds have given private equity managers a wider range of alternatives to a secondaries process. A marquee deal blowing up could spook the market and make LPs wonder if GP-led restructurings are really such a good idea after all – something many secondaries firms that focus on GP-leds will no doubt have been worrying about this week. And concentration risk – particularly for single-asset deals – could force LPs to re-evaluate the role secondaries plays in their portfolios. Why pay a secondaries fund fee and carry for concentrated exposure to a single company when your buyout GPs offer co-investments on a ‘no fee no carry’ basis? So the argument goes.
Over the last five years, proponents of GP-leds have all parroted the same catch-phrases: these deals give “optionality” to LPs; this is secondaries at its most creative; they allow GPs “extra runway” to maximise value in a portfolio company; and the most oft-used term of them all: GP-leds allow for “win-win-win” on behalf of the GP, its LPs and the incoming secondaries buyers.
Well, now is the time for the GP-led market to step up to the plate. A temporary pause on deals is inevitable, while the entire financial industry waits for the dust to settle to get a clearer view on valuations – and it’s likely to be carnage. But if GP-leds really are the wonder drug they’ve been purported to be, it’s their time to prove their worth. Portfolio companies will need extra cash from their private equity owners to pay staff, keep the lights on and prevent liquidations. GPs who, for whatever reason decide not to seek fund extensions, will require that extra runway now more than ever. LPs which want to cash out of a buyout fund because they need liquidity or because they don’t feel they’re aligned with their GP should have the chance to do so – at a reasonable, market-tested price – and it is the GP-led buyers that are better positioned than any to provide this service.
At a time when many private equity-owned businesses around the world – especially those that have been hit disproportionately by the covid-19 crisis like those in the travel, retail and hospitality sectors – require capital to even stay afloat, proving the concept of “win-win-win” is more important than ever.
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