General partners – with and without troubled funds – are increasingly seeing the secondaries market as a fundraising tool.
“Stapled deals have been around for a long time,” a partner at a European advisory firm recently told me, reckoning they have existed for nearly a decade. “But they’re becoming more common. Not only has the frequency increased, they are also becoming more organised.”
The archetypal stapled transaction used to occur when a major limited partner wasn’t re-upping in a follow-on fund for strategic reasons, i.e. because it decided to stop investing in private equity or rebalance its exposure to certain sectors or regions. In those situations, advisors acting on behalf of the LP would find a new investor to purchase the exiting LP’s stakes in the manager’s old funds, while also ‘stapling’ a commitment to the GP’s latest fundraise – either because it was demanded by the GP or because the new LP was keen on the latest fund, too.
Staples are still happening for those reasons.
But they have also become a tool to revamp LP bases. In some cases, it’s for poorly performing funds that have encountered problems post-GFC and existing investors don’t want to re-up. Whether that fund is technically considered a zombie, or it’s managed by a GP that otherwise has a good track record, the secondaries market has shown it can help facilitate a difficult fundraising process.
Then there are the GPs without any problems at all that want a speedier and more efficient process. As another London-based advisor put it, a staple can help create momentum and secure capital for a first closing.
In these cases, secondaries buyers aren’t just filling a hole left by one LP; they’re typically offering liquidity to all the existing LPs in the older fund(s) and committing fresh capital to the GP’s latest fundraise. The other marked difference is these transactions tend to be GP-initiated, which sources say is understandable as managers try to be more proactive, strategic and organised in the way they fundraise.
“There’s always capital not coming back,” another advisor, based in New York, told me this week. “The whole premise of a GP getting involved and spearheading a fundraising with multiple LPs seems like a natural evolution of the fundraising market.”
By the way, it’s not just GPs that are profiting from the secondaries market for fundraising purposes. LPs are also using it to their advantage.
“With popular funds, LPs are having problems getting access at all,” said a fundraising professional. He told me that some LPs with active secondaries programmes try to pick up interests in an existing fund months before a GP comes out to market with a new fund so they’ll already count as an existing investor and gain access to the next fund.
“It’s a market of haves and have nots,” he said.
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