How to keep GP-leds on track

Challenging exit and fundraising conditions, high interest rates and a growing need for LP liquidity amid subdued distributions all laid the groundwork for more sponsors to shop assets on the GP-led market over the last year.

However, there is more activity than there is buyside capital to accommodate it, as affiliate title Private Equity International has found in its latest GP-Led Secondaries Special Report.

An increase in GP-led dealflow has implications for sponsors, existing LPs and secondaries investors. A rising number of GPs sought to move assets into continuation funds in 2023, whether to meet LP liquidity needs, gather additional capital to extend the value creation pathways of their trophy assets or as an alternative to narrowing exit options amid an icy M&A and IPO environment. While this has exacerbated the supply/demand imbalance, there are signs that the buyside is beginning to become better capitalised.

Faced with this growing number of continuation fund transactions coming across their desks – along with the relatively short timeframes in which to make roll or sell decisions – some LPs have been revamping their policies to give them more flexibility to invest in these processes.

Meanwhile, secondaries buyers have a greater range of deals to choose from and can therefore be more selective about where they deploy capital.

In such a competitive market, sponsors need to ensure all the pieces are in place to get their transactions successfully over the line. Alignment is key here, as is making sure these deals are done for the right reasons and with the right assets: a Lazard survey found that more than half of secondaries investor respondents experienced failed deals in at least 20 percent of the GP-leds they evaluated in 2023, citing mismatches in pricing and valuation expectations, issues with asset quality and performance, and a lack of capital among the top reasons for failure.

“It is important to be realistic about timelines because there are so many parties that need to get aligned,” HarbourVest Partners managing director Rajesh Senapati tells PEI. “You need to work backwards from the desired closing date, identify when the election deadline needs to be, when documents need to be drafted, how long the due diligence process needs to run, and then ultimately when the process needs to be launched.”

Keeping such timelines in mind and engaging with all parties as early as possible will be crucial to ensuring these transactions remain on track.

Write to the author: louise.f@pei.group