GP-leds: Put your money where your mouth is

Alignment is paramount in continuation vehicle transactions, and for a deal to be successful secondaries buyers will want to see the GP demonstrate true commitment to their second run at the asset or assets. “In general, the more dollars that a GP is putting at stake, the more confidence the market will have around alignment in the deal,” says Rajesh Senapati, a managing director at HarbourVest.

“Insufficient alignment is a deal killer,” agrees Amyn Hassanally, a partner and global head of private equity secondaries at Pantheon, who adds that active members of the general partnership need to be thinking about rolling over 100 percent of their crystallised carry as a bare minimum. “Generally, buyers will also want to see new money, possibly from the latest flagship vehicle, going in as well.”

Alignment also needs to be strong at the management team level. “Management teams should be rolling over the vast majority of their proceeds,” Hassanally says. “Taking anything meaningful off the table can suggest the management team does not believe in the next leg of growth, unless there is a robust rationale.”

Misalignment can also emerge between different constituent groups within the buying pool. “Over the past year or two, we have started to see situations where the lead investor in the continuation vehicle is receiving economic incentives such as management fee discounts or different carry terms to the secondaries investors coming in behind them,” says John Rife, a partner at Debevoise & Plimpton. “That can create a huge alignment issue. The lead investor is expected to negotiate on behalf of the continuation vehicle and, if they are not participating on an equal economic footing with other participants, that can have a significant knock-on effect on timing, should non-lead secondaries buyers seek to renegotiate.”

Of course, alignment doesn’t only refer to the GP/management team and incoming secondaries buyers; it also refers to the GP’s existing LP base. “You have to maintain alignment with your underlying investors,” says David Lippin, a partner and head of investor relations at One Equity Partners. “They are the core of your franchise at the end of the day. A continuation vehicle is a one-off fund, but you want underlying investors to stay with you for the long haul and feel confident in the decisions made by the GP.”