GP-leds: Picking the right secondaries partners

Secondaries investors are inundated with continuation vehicle opportunities right now, so the sponsor’s sales pitch and materials need to be strong. However, the nature of these deals means that secondaries buyers should be viewed as potential partners rather than conventional counterparties, which should influence a GP’s approach to the diligence process.

“Transparency and a partnership mindset are critical,” says Amyn Hassanally, a partner and global head of private equity secondaries at Pantheon. “The diligence process marks the start of a long-term relationship so the approach should be collaborative and not adversarial.”

Gerald Cooper, a partner and head of the North America secondaries advisory practice at Campbell Lutyens, agrees: “Diligence tends to be lighter in these transactions than in a traditional M&A process because secondaries investors are relying significantly on the alignment being created by the GP. It is about forging a partnership.”

Cooper adds that secondaries investors are likely to undertake a level of primary diligence as well, scrutinising the GP’s track record, ability to add value and relationship with management teams. “GPs are not only showcasing the asset, but also themselves, and if that diligence plays out favourably they could end up gaining not only an LP for the continuation vehicle but also for future flagship funds.”

Given the long-term nature of the relationship, picking the right partner is paramount. Not all secondaries houses are the same. “We were in a unique position,” says David Lippin, a partner and head of investor relations at One Equity Partners, which closed a $1 billion continuation fund last year. “When we spun out from JP Morgan in 2015, we were backed by three secondaries firms, and spoke to many more, so we understood this market before heading into a continuation deal.”

It is also important to remember that in any sizeable transaction there is likely to be a syndication process, in addition to the selection of a lead buyer or buyers. “Starting communications with key syndicates early and often is a key ingredient to a successful transaction,” says David Perdue, a partner and global head of the secondaries advisory business within PJT Park Hill. “Given the supply/demand imbalance in the current market, identifying syndicate investors early and accelerating that selection process de-risks the transaction.”

“One of the key lessons we learned from our continuation vehicle last year was to go broad when initiating the process,” says Lippin. “We found two investors to pick up 70 percent of the transaction, but that still left more than $200 million that we had to go out and raise. One thing I wish we had done differently was engage with a broader group of secondaries investors earlier on. We didn’t get started until we had the lead firms committed. That made the process much harder on the back end.”