Holding all the cards

There’s been a lot of moaning and groaning on both sides of the Atlantic recently about stapled secondaries deals making a comeback.

“It has started to happen at the big end of the market where a lot of the secondaries guys have so much money to play with that it becomes targeted,” said one European intermediary.

Meanwhile, a New York-based secondaries investor complained to us recently about large asset managers needing to put so much capital to work that regularly ponying up extra cash to seed an existing manager or a spin-out’s new fund simply wasn’t material – and was changing market dynamics. There’ve been reports, for example, of some auctions going to the second- or third-highest bidder because of the willingness to provide capital for new investments.

“It’s a way of sweetening the deal,” says another market source.

But how ‘sweet’ is too sweet, seems to be the question a number of buyers are asking.

“If the GP wants something like $10 million or less” and the secondaries deal is a good one, then one mid-market secondaries firm says it would consider that a “rounding error” and a staple worth agreeing.

Some LPs, such as CalPERS, have told us this trend is difficult for them – as often they’re using the secondaries market to trim primary relationships, not increase them.

“I don’t see it as irrational for secondaries buyers to provide primary capital off the back of a direct secondaries deal ,” says Nicholas Lanel, managing director at advisory firm Evercore. “LP interest secondaries – which represent the bulk of the market – do incorporate a fair element of undrawn capital after all.”

But it seems the staples being asked on some big-ticket transactions may be hampering negotiations. Several sources have said the JPMorgan One Equity spin-out has been slowed down by the seller’s requirement for much more than a 7-figure staple, which is also the buzz around Rohatyn Group’s sale of CVCI fund interests.

Lanel pointed out staples can be seen as a positive or negative, depending on the team getting the extra cash, but there’s no denying it’s adding to the complexity of negotiations.

“You don’t negotiate on price alone anymore; you negotiate on price, then on primaries and then on the deal for the management to take on that primary,” Lanel said. “We’re in a market where the sellers and the management teams hold the cards.”

And if they hold them too tightly, they may end up having to fold.