GP-leds: Selecting the right assets

As supply continues to outstrip demand, it is ever more important to clearly demonstrate why particular assets are well suited to a continuation fund process.

Given the pronounced supply/demand dynamic that exists in the GP-led secondaries market, the selection of the asset or assets to be placed into the continuation vehicle is paramount. “There was a time when you could get away with selecting a couple of good companies and then maybe slipping in another that you couldn’t otherwise get rid of,” says Debevoise & Plimpton partner Gavin Anderson. “I think those days are largely over. It is a buyer’s market, and to get buyers’ attention you need assets with a compelling story.”

David Lippin, a partner and head of investor relations at One Equity Partners, agrees. “It needs to be a strong business capable of providing a favourable return for LPs in the existing fund while at the same time having an attractive valuation for new LPs to potentially capitalise on the future growth and upside in the continuation vehicle. Those dual objectives can be challenging to meet.”

Meanwhile, Debevoise & Plimpton partner John Rife says deals with a strong transformative component are proving popular, citing Pollen Street Capital’s 2023 continuation vehicle as a case in point. Pollen Street only acquired insurance group Markerstudy in 2021 but moved it into a continuation fund last year, alongside a parallel M&A process that saw Markerstudy acquire Atlanta Group in a bolt-on transaction.

“Those are the deals that are resonating best with the market,” Rife says. “There needs to be some sort of time sensitivity as to why a deal needs to execute today, rather than in two years’ time. What doesn’t resonate well is to say that you have a good asset that you can’t sell to anyone else right now, so you are going to sell it to yourself.”

Balancing act

However, there is a tension at play between the need to remain laser-focused on the best and most appropriate assets, and secondaries buyers’ growing aversion to the heavy concentration of single-asset deals. This is a line that GPs must tread carefully. “The big single-asset deals that generated so much excitement in the wake of covid are perhaps falling out of favour a bit as secondaries buyers prioritise diversification,” says Anderson.

“The big single-asset deals that generated so much excitement in the wake of covid are perhaps falling out of favour a bit”

Gavin Anderson
Debevoise & Plimpton

But Amyn Hassanally, a partner and global head of private equity secondaries at Pantheon, says GPs still need to be highly selective and may be better off pursuing a single-asset deal, unless they have multiple assets that are of sufficient quality to attract buyers.

This is a balancing act that One Equity’s Lippin, whose firm closed a continuation fund involving two assets last year, knows only too well. “I would certainly embark on a continuation vehicle again, but I would do it differently. We started out with one company in mind, but our advisers recommended adding another because secondaries investors preferred multi-asset deals. The problem was we ended up with something that wasn’t a single-asset deal, but didn’t have enough assets involved to be considered a multi-asset transaction. It was a bit of a no-man’s land. In hindsight it would have been better to focus on one company and take that to market.”