When conceived and executed the right way, GP solutions transactions can create a win for all parties involved. However, certain transactions present clear conflicts of interests. Greenhill Cogent’s Brian Mooney and David Eberstein discuss how to manage these conflicts and identify some key components of a successful GP solution.
There must be a clear motivation for the LPs to be supportive of the transaction. If a contemplated transaction is motivated predominantly by the GP seeking to improve its position (for example, via new economics or fundraising), then it is likely to face significant headwinds from the outset. In fact, one of the first pieces of diligence that potential buyers in a GP solutions transaction will want before they commit meaningful resources is clarity on the LPs’ motivations for supporting the potential transaction.
GPs should have an early and open dialogue with their existing investors when they are contemplating a potential GP solutions transaction. At a minimum, GPs should discuss their thought process and potential considerations with the largest LPs and any LP advisory committee members. This discussion should address the key issues that the transaction might solve, an evaluation of the alternatives and how the GP intends to manage the inherent conflicts that are present in most GP solutions transactions.
In addition to early transparency, during the actual process, GPs should keep their LPs informed of timing, pricing, potential terms and, most importantly, the likely set of options that will be presented to LPs.
Evaluation of alternatives
As part of the initial discussion with existing LPs, the GP should present an evaluation of relevant potential alternatives (status quo, portfolio liquidation, preferred fund-level capital, multi-year extension, and so on) to solve the identified issues.
Representation of existing LPs
The use of advisors in GP solutions transactions has become almost ubiquitous. Some, but not all, of the inherent conflicts can be addressed via a competitive process run by an advisor.
However, the selection of advisors and which parties are represented by an advisor is evolving. Advisors are typically selected by the GP, which then negotiates and agrees on advisors’ role, responsibilities and fee (often borne by the LPs that elect to sell). Historically, existing LPs have not had meaningful input on advisor selection nor have they had someone directly representing their interests and negotiating on their behalf.
We expect to see greater demand from existing LPs for input into the selection of an advisor and their role, responsibilities and fee; and/or retention of a separate financial advisor to the LPs or the LP advisory committee, whose responsibility is to represent the interests of the LPs and to negotiate on their behalf.
For those LPs that have either willingly or unwillingly been a party to a GP solutions transaction (in particular, a fund restructuring), they are likely very aware of the significant amount of time and resources required to achieve a successful outcome. As such, LPs can benefit not only from expert advice, representation and market insight, but also from a resource and time perspective.
Competitive, dynamic and attractive pricing
Fund restructuring and GP-sponsored tenders offers represent the largest volume of GP solutions transactions to date and require LPs to ultimately decide whether they want to sell. In Greenhill Cogent’s experience, transactions that price at, or close to, the GP’s reported net asset value (NAV) tend to find significantly higher levels of support from existing LPs and a higher proportion of LPs that elect to sell. It is often much more difficult for LPs to justify selling at a large discount, even if the discount may represent a fair price for the assets in the fund.
The recent dramatic increase in GP solutions transactions has certainly been helped in part by the strong economic environment and highly competitive secondaries market where many assets are pricing at or near net asset value (NAV). While capital supplied by potential buyers in the GP solutions market is not required in order to restructure the terms of a fund (fund life extension, change to management fees, and so on), it is often required in scale in order to make meaningful changes to a fund’s existing terms. It is, therefore, beneficial that some critical mass of existing LPs find the liquidity option attractive enough to sell.
We expect that if the market dynamics change and secondaries pricing falls materially from the levels witnessed in the first half of 2015, GP solutions transaction volume will slow dramatically or will have to evolve in order to continue to garner support from existing LPs.
The market for GP solutions transactions has experienced tremendous growth over the last few years. In addition, the types of transactions being undertaken have evolved since the outset of the market in 2012. We expect this trend will continue as GPs and LPs alike recognise the need and ability to solve key issues while providing a positive outcome for all stakeholders.
Brian Mooney is a managing director of Greenhill Cogent, part of Greenhill’s Capital Advisory group, and has more than 15 years of secondaries market experience.
David Eberstein is a vice-president of Greenhill Cogent, part of Greenhill’s Capital Advisory group, and has significant experience in advisory, fund management and principal investing.
This is an extract from Private Fund Restructuring.