GPs are strengthening their skin in game with continuation funds – William Blair

Most fund sponsors invested additional capital on top of carry rollover in such processes last year, according to the investment bank's debut Secondary Market Survey Report.

General partners are attempting to strengthen alignment with investors in the continuation funds they manage to compensate for a shift in term dynamics in GP-led processes, according to research from investment bank William Blair.

Around 55 percent of GP-led deals surveyed by the mid-market bank involved GPs investing additional capital on top of carry rollover, William Blair noted in its first Secondary Market Survey Report.

“We believe this figure represents a significant increase versus prior years, when rolling 100 percent of crystallised proceeds was more of the standard,” Mike Custar, managing director and head of private capital advisory at William Blair, told Secondaries Investor.

“A GP investing new dollars creates a stronger alignment between the GP and new investors. While rolling carry also creates alignment, investing new dollars at the buyers’ basis strengthens it.”

An LP’s actions in a GP-led process largely depends on the specific circumstances and terms of the process, affiliate title Private Equity International found in its LP Perspectives 2023 Study. Most investors – 75 percent – said their actions would depend on the circumstances, while just 18 percent said they would sell their exposure and 7 percent said they would roll over their exposure to the continuation fund.

In around one quarter of deals William Blair surveyed, some fund sponsors also invested capital in GP-led deals from a flagship fund alongside a continuation fund, the report noted.

GPs investing additional capital can come in the form of out-of-pocket cash to augment their GP commitment, and in some cases this is supported by GP financing facilities, Custar said.

“In a slower exit environment, we expect the use of those facilities to continue,” he said.

Custar joined William Blair last year from M2O where he had set up its secondaries business. He has since built out its business, hiring additional people from Lazard and M2O, including Jake Stuiver from the latter to lead LP secondaries.

William Blair estimates that $105 billion traded on the secondaries market last year – a drop from $133 billion the prior year. This was driven by macroeconomic challenges and a slowdown in fundraising across private markets, rather than a decline in investors’ interest in secondaries as an asset class, it noted in the report.

The bank expects $135 billion in deal volume this year.

The bank also found that:

  • Around 35 percent of deals involved price involving third-party pricing, set by another sponsor through a minority investment or co-control deal.
  • The most in-favour types of assets for GP-led deals are: healthcare, business services, industrial growth products, consumer and retail, technology.
  • Status quo options, where LPs have the option to retain their stake under the same economic terms from the existing fund, re-emerged in LP rollovers, with 19 percent of deals offering this. Fully 71 percent of deals offered LPs a “reinvestment” option; 26 percent offered a “modified status quo” option.

William Blair conducted the survey in December 2022 and January and canvassed views from 76 secondaries investors, comprising almost half pure secondaries investors; 38 percent combined primary and secondaries investing; and the remainder being opportunistic buyers.