1 Involve the right set of motivated buyers
One of the critical elements of a successful and fair auction is the involvement of the right set of motivated buyers, according to Nigel Dawn, head of Evercore’s Private Capital Advisory Group. The firm advised on more than $30 billion of GP and LP-led deals last year. Dawn says: “Making sure the right group of capital is being introduced to the opportunity is key. There is a relatively small group of buyers that have dedicated pools for secondary transactions, so the objective is to make sure all the groups are in that would be motivated to buy the assets.”
While for buyouts assets that might be a large number of potential bidders, for venture capital portfolios it would be much smaller, for example. “You also need to ensure that those specialist buyers who will be interested in only one or two assets are there, in addition to groups who might buy the whole portfolio,” Dawn says. “You need to be able to compare portfolio bids with mosaic bids, to see whether the whole is worth more than the sum of the parts.”
Anthony Shontz, who leads the secondaries practice at Partners Group, cautions: “There’s a fine line between a competitive transaction with price discovery and going too wide. We will often look at the situation and assess it, and if we see 20 or 30 different bidders, we probably won’t spend a lot of time on it.”
2 Provide good and complete information on the underlying assets
It is tremendously important to make extensive information on the assets available to all the interested parties, says Ezra Borut, a corporate partner with Debevoise & Plimpton: “At the end of the day, any buyer is going to require access to good information. Some buyers may already be in the fund or in some of the underlying assets, so in order to ensure all your buyers are coming in with at least the possibility of being on an equal footing, and to maximise the price, you need to make sure all that information is available.”
A key component is a first-rate data room open to all parties, complete with detailed information from the latest annual reports, quarterly statements and legal documentation.
Ample access will also be needed to the underlying GP.
“Fund sponsors or sellers need to make sure they have a data room to provide access to information, and allow interaction and engagement back and forth to make sure the process is as palatable as possible to existing investors and provides maximum closing certainty,” says Isabel Dische, partner and co-leader of the institutional investor team at Ropes & Gray. “There can be discussions around the scope of the information shared – sometimes sellers do not want to share side letters, for example, and that can create problems for some buyers.”
3 Keep your LP community firmly on board
When embarking on a GP-led transaction, two processes often run in parallel, with conversations going on with the LP advisory committee or a larger subset of investors as to the type of transaction that might be palatable at the same time as engagement with the market. “The key element behind having a successful GP-led auction is making sure that those are happening alongside each other, and that the GP is not getting too far ahead of its LPAC,” Dische says. “We have seen processes where that has been an issue.”
A particular concern for the LPAC will be whether the GP is providing the same information to all potential buyers, and there is much room for conflict even within the LP group, where investors may be seeking different outcomes.
The areas where LPs tend to be most concerned, advisors say, are where there are stapled commitments to ongoing fundraisings involved, or other follow-on elements being offered to new investors.
4 Explain the transaction rationale
Two questions in the spotlight for LPs in GP-led deals are how bids are being compared and why a particular course of action is being recommended. Andrew Rearick, counsel at Debevoise, says: “As fund sizes get larger, sponsors often require a consortium of buy-side secondary fund investors. It is likely that no single investor is going to offer up the best terms for the entire portfolio, so weighing up competing bids where different bidders may offer better or different terms but for only a portion of the deal can be tricky.
“The other question for LPs is why are you recommending this transaction in lieu of other options, such as disposing of assets one-by-one or a fund extension. Showing a robust process and setting out a clear rationale as to how the GP determined to pursue a certain transaction over any alternatives is key.”
5 Engage experienced advisors
Finally, as terms continue to standardise, best practices emerge and timelines come down on secondary auction processes, the importance of working with advisors who are well plugged into the market comes to the fore. Since the Institutional Limited Partners Association published guidance on GP-led secondaries in April 2019, on-point advisors can really make a difference. “We think it’s really crucial in the context of running these auctions that parties engage experienced advisors who have traversed this path before,” Borut says. “Having advisors who really know how these transactions are structured, how they work, who the players are and what their expectations are is key. That means involving appropriate intermediaries at every stage, as well as legal and tax advisors.”
The buyer’s perspective
An active, constructive dialogue is important when it comes to shaping the process, structuring and timing
“Stumbling blocks in GP-led processes include alignment of interests with the GP and asymmetry of information between new and existing investors,” says Anthony Shontz, managing director and co-head of private equity integrated investments Americas at Partners Group.
“GPs may find they will benefit from a new pool of capital being raised and there’s sometimes a motivation for a GP to have a lower price if they would benefit from more upside going forward. We have had cases where a GP has shared information on a portfolio we were diligencing and tipped us off on details they were not making available to existing LPs. In those circumstances, we have to say if that is how they are treating their investors, we do not want to become an investor.
“You can find a way through all these issues with disclosure and data rooms, but you have to work to create fairness. The GP community really has to make sure everyone has equal access to information.”