A process run by Harvest Partners allowing limited partners to cash out of their interests in two older funds at a relatively high price is facing syndication challenges, sources told affiliate title Buyouts.
Harvest’s tender offer is among several that GPs are using to give existing LPs an option to generate liquidity, while also trying to boost new fundraisings. The process, known as a tender offer plus staple, has come back into popularity as fundraising has slowed in the uncertain economic environment.
But syndicating large deals has become challenging in the dislocated markets. Beyond the lead buyers, who are generally ready to deploy vast stores of uncalled capital, finding minor investors is a tougher job, sources said.
No one from Harvest returned a comment request. The firm is working with Evercore on the process, which has gone out to the LPs of Harvest’s seventh and eighth funds. Harvest closed its seventh fund on more than $2.2 billion in 2016, and its eighth fund on more than $4.1 billion in the 2019-20 time frame.
In a tender offer plus staple, existing LPs are offered the chance to sell out of their interests in the fund at a pre-set price to a pre-arranged buyer or buyers. The external buyers also agree to kick in a portion of fresh capital to the new fund – known as a staple. Staples are made at a ratio – generally around three to one: for every $3 of secondaries sales, they invest $1 of primary capital into the new fund. The staple ratio on the Harvest process is two to one, sources said.
The lead buyer for both Harvest funds is Ardian, sources said. Other investors on Fund VII include StepStone Group and Blackstone’s Strategic Partners. On Fund VIII, StepStone is involved along with Ardian. HarbourVest was said to be a buyer on the eighth fund, but dropped out. It is not clear why. A HarbourVest spokesperson declined to comment.
Pricing beats market
Pricing appears richer than what has been seen in the current market, which is averaging around 15 percent discounts to net asset value, sources have said in prior interviews. LPs in Fund VII are able to cash out of their stakes in cash at either 91.5 percent of NAV as of the first quarter, or 95 percent of NAV as of the same date in a deferral option, which would pay 50 percent at close and 50 percent in 12 months, sources said.
For Fund VIII, LPs could cash out at around 91 percent of NAV as of the first quarter, or 95 percent of NAV in a deferral, with 25 percent payment at close and 75 percent in 12 months, sources said.
The lead buyers would kick in a staple of primary capital to Harvest Partners Fund IX, targeting $5.3 billion, sources said. Many funds this year, especially those launched in the second quarter and beyond, are having trouble attracting capital, both because of the market dislocation and because LPs have been burdened by an influx of re-ups and new fund products from their existing GPs. Some have been ruthlessly culling their relationships in an effort to triage their portfolios, sources told Buyouts.
Another challenge in tender offer deals is getting LPs to actually sell, which they are more likely to do at higher prices. When not enough LPs sell into a tender offer, the deal is smaller and often becomes less attractive to a buyer.
“The challenge in these can be pricing and in this market, based on the record date, will the optical discount be acceptable to the existing investor base,” a secondaries market source said in a previous interview.
For pricing, the median high bid across all strategies in the first half was 92 percent of net asset value, according to Greenhill & Co’s first-half volume report. Pricing for buyouts funds fell 9 percent, to 88 percent of NAV in the first half, Greenhill found. Prices have continued to fall throughout the summer and into the fall, sources said.
However, LPs appear to be growing more willing to sell in the tight liquidity environment. Evercore reported in its first-half volume survey that 77 percent of respondents said they sold in GP-led asset-based deals, up from 64 percent in 2021. While asset deals such as single and multi-asset continuation fund processes are different, the numbers show increasing appetite among LPs for liquidity in secondaries.