Single-asset restructurings grew to account for around one fifth of the GP-led market by volume last year with headline deals including Warburg Pincus‘ process on Allied Universal and Blackstone‘s Phoenix Tower International transaction.
For HarbourVest Partners, conducting due diligence on GP-led transactions involving sole companies has become more akin to an M&A process, according to David Atterbury, a London-based managing director at the firm, speaking on a webinar in late May hosted by advisory firm and placement agent Cebile Capital.
“We’re increasingly using third-party advisors to supplement the diligence and the information we have coming over from the general partner, depending on the circumstance and the specific risks,” Atterbury said.
“I would expect over the next couple of years to see more and more vendor due diligence in terms of commercial due diligence or financial due diligence coming into these processes to try to facilitate them and make them more efficient, rather than having each of the large buyers go off and do their separate work,” he added.
Getting a clear sense of carry crystallisation, which LPs are rolling over their interests and which investors are reinvesting more into a transaction helps to give buyers more comfort, he said.
For Adams Street Partners, concentration risk is the biggest hurdle for secondaries investors to overcome.
“Inherently, the secondary market is capital constrained, meaning they cannot sponsor and take down an entire company and be the sole LP,” said Troy Barnett, a partner at the Chicago-headquartered firm. “A lot of these assets are meant to be held for a longer duration and do not provide the secondary cashflow dynamic that most secondary investors rely upon and are interested in.”
With a limited buyer universe, at some point the market for single-asset deals will become saturated, he added.
Barnett questioned whether single-asset transactions were better suited to dedicated or opportunistic vehicles focusing on the strategy to account for portfolio construction and LPs’ aims.
“A lot of large institutional capital investors look at this like a co-investment and view it that way, so they bring their co-investment teams to bear on the transaction,” Barnett said. “It’s a bit of a hybrid, it’s sort of in the middle. It’s a new and growing part of the market that we find interesting, but I will say that there are a lot of questions to be answered.”
Secondaries Investor is aware of at least one global investment firm – with its headquarters in Europe – which was considering launching a dedicated fund for single-asset restructurings and which has since shelved those plans.
In early June, Secondaries Investor reported that Jon Costello, who was global head of secondaries advisory at PJT Park Hill, had left the investment bank and was set to launch a strategy focusing on single-asset deals with backing from Stone Point Capital.
In terms of concentration, HarbourVest builds diversification at an overall portfolio level and thus has been comfortable taking single company risk, provided the deal’s cashflow profile looks and feels like a secondary cashflow profile, Atterbury said.
“By that, we’re not looking to take single company risk where we may have a five-year hold, but it will be something where we may have a shorter term hold with the possibility of a refinancing because the asset’s towards the ends of its fund’s life,” he said.
Chris Robinson, a corporate partner at Kirkland & Ellis, said GPs considering such processes should think early on threshold limits in fund documentation that dictate whether a single buyer is enough to close a transaction or whether multiple buyers are needed.
“Thinking through that early in the process to make sure that one, if you’re working with an agent, that you’re identifying who [the] potential additional buyers that are part of the syndicate could be, and also thinking through the documents as it relates to whether there are thresholds that you may need to meet” is crucial, Robinson said.
Overall, buyers should be looking for good alignment between the parties involved, whether in a single-asset transaction or GP-led opportunities in general, according to Barnett.
“At its core, the transaction has to make sense and there has to be alignment between buyers, sellers and the general partner involved,” he said. “Whether it be liquidity, capitalisation for the company, offensive reasons, defensive reasons, resetting the duration for a fund…there’s lots of different reasons why a transaction would need to take place and for it to be a good event for a fund and for all constituents involved.”