The potential opportunities in the GP restructuring market are “huge” because it allows the general partner to reset the economics of a fund, said Brett Gordon, a managing director at HarbourVest Partners, during a Dow Jones webcast on Tuesday.
Right now there are a lot of funds raised in the early 2000s that are at the end of their natural life, as well as funds that came out of the financial crisis, Gordon said.
“The GPs don’t have an economic incentive to manage them out and that encourages the GP to create this type of opportunity to really reset its own economics,” he added.
However, the significant opportunities come along with a host of concerns that can create an enormous amount of execution challenges and risks. “In a deal like this, you’re not just transacting with one seller, you might be transacting with 50, 60, 70 different LPs.”
Andy Nick, a director at Cogent Partners, agreed that dealing with diverse LPs with different objectives can be a roadblock to doing these kinds of deals, and there often isn’t a clear path to pleasing LPs that are selling.
“There are a lot of situations where a GP restructuring looks great on surface but when you dig into it, it becomes very hard to actually find a solution that’s a win-win-win for the GP, the selling LPs and the buyer,” Nick said.
The growing emergence of GP restructuring is healthy for the secondaries market because it presents choices to investors and gives the GP an opportunity to maintain their organisation going forward, according to Troy Barnett, a partner at Adams Street Partners.
Still, Adams Street will remain cautious in this market. “The reason why these transactions exist in the first place is probably because something has gone wrong, or at least not optimal for certain partners in the situation, and therefore we’re trying to focus on situations where we think management is of the utmost quality, so we are very cautious and very selective,” said Barnett.