GP-leds: The price is right

Price setting in a GP-led secondaries deal is inevitably more complex than in a true transfer of ownership transaction. The sponsor is inherently conflicted, being on both the buyside and sellside, so running a fair process that establishes an objectively valid valuation is critical.

For that reason, it is becoming increasingly common for a fairness opinion to be sought. It is also the norm to run a competitive process. “It helps if you can attract enough offers to demonstrate a market clearing price,” says Gerald Cooper, a partner and head of Campbell Lutyen’s North America secondaries advisory practice. “That reassures LPs that a robust process has been executed.”

In order to attract that critical mass of bids, it helps to work with a specialist intermediary with a nuanced understanding of the marketplace. “The best buyer for one deal may not be the best buyer for another,” Cooper explains. “Certain groups have demonstrated greater appetite for particular sectors, for example, or have strong relationships with particular GPs. It is also important to be aware of where different secondaries buyers are in their investment lifecycles. All of these things have an impact on how attentive they may be to a particular transaction.”

There can be an exception to the competitive process rule if a previous price-setting transaction has taken place, such as the sale of a minority stake. In either case, according to David Perdue, a partner and global head of the secondaries advisory business within PJT Park Hill, the price should represent a strong crystallisation event for existing LPs. “Market guidance points to at least a 2.5x return, with most transactions occurring in the 3x to 4x range.”

But price is not always the deciding factor when GPs select a lead investor. “Scale of capital is critical to ensure certainty of execution,” says HarbourVest managing director Rajesh Senapati. “For example, if you have a $1 billion transaction and you have a $50 million investor willing to pay 95 cents on the dollar and a $500 million investor willing to pay 92 cents on the dollar, you need to weigh the benefits of execution certainty for your LPs against the highest price.”