Keeping LPs centre-stage in the secondaries market

In part I of sister publication Private Equity International's secondaries roundtable, market participants discuss restructurings, hybrid structures and why European GPs are leading the way.

GP-led transactions stole the spotlight in a record-breaking year that saw $58 billion of secondaries transaction volume. That segment of the market – which has experienced nearly 50 percent annualised growth since 2011 – accounted for around $14 billion in 2017, according to research by Greenhill Cogent. The advisory firm predicts GP-leds could exceed $20 billion this year.

Li works in Ardian’s fund of funds and co-investment teams and is based in New York. The firm has about $67 billion in assets under management, including $38 billion in its fund of funds strategy, which targets primary investments and secondaries.

New York-based Schwartz heads the firm’s fund formation practice, representing sponsors of, and institutional investors in, private equity funds. He also regularly represents GPs and LPs in traditional and complex secondaries recapitalisations and restructurings.

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Nick advises limited partners and general partners on secondaries market transactions and is based in San Francisco. Greenhill Cogent has approximately 35 professionals dedicated to secondaries in five global offices.

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Based in Boston, Keay focuses on global secondaries investments at HarbourVest, which has deployed more than $60 billion in assets in private equity since inception, including nearly $20 billion in secondaries since 1986.

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Landmark Partners focuses solely on secondaries in private equity, real estate and real assets with about $22 billion of invested and committed capital. Humber is based in the Boston office.

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Based in Denver, Shontz is co-head of Partners Group’s integrated investment team in the Americas, which focuses on primary investments, secondaries and co-investments. The firm has $74 billion in AUM and invests over $2 billion a year in secondaries.

It should come as no surprise, then, that the segment was the first topic of conversation around the table at sister publication Private Equity International’s annual secondaries roundtable in Debevoise & Plimpton’s New York office in late March.

David Schwartz, who heads up the law firm’s fund formation practice, says there has been a rise in interest in these transactions as the market continues to see many more funds that still have significant assets left at the end of their life.

“Depending on the LP base and stage in a GP’s fundraising lifecycle, GPs are often very proactive and use a restructuring as a segue into their next fundraise,” he says.

In the early days of the GP-led secondaries market, the transactions were typically used by franchises looking to wind down, says Andy Nick, managing director at Greenhill Cogent.

“Now we’re seeing those same types of transactions from very alive-and-well GPs that are just using the market as a tool to reduce their administrative burden or wind down a fund that may have been around for 12 or more years. Maybe the investors did very well on it and the GP is on Fund VI, VII, VIII and they’re thinking about what to do with Fund III,” Nick says. “We’re seeing GPs that arguably have greater AUM and probably greater forward prospects than some of the earlier GPs who used the market.”

GP-led deals used to take two basic forms: a tender offer, where LPs can opt to liquidate their stakes and the fund structure doesn’t change; or a restructuring, where assets are moved out of the fund into a new vehicle. Today, there are more options on the table, says Anthony Shontz, managing director and co-head of private equity integrated investments for the Americas region at Partners Group.

“More recently we’ve seen some hybrids such as the strip sales, where you bifurcate the portfolio,” he says.

Last year Warburg Pincus sold a roughly $1.2 billion strip of its Asia portfolio, made up of stakes in 29 companies, into a new vehicle with new terms. Lexington was
the majority buyer, joined by Goldman Sachs Asset Management and a few other parties.

Other ways to split the portfolio include by public and private assets, or – particularly in the case of infrastructure – by mature or de-risked assets and those that are still development-oriented, Shontz explains.

Some deals have combined GP-led transactions and preferred equity.

“We have worked with GPs to create solutions for all parties involved,” says Scott Humber, a managing director at Landmark.

“In this ‘thought partner’ approach, we have structured transactions that involved a preferred interest in multiple funds. In our experience, we have completed transactions to solve GPs’ desires to take on strategic capital without taking on permanent capital. We have developed defined exit mechanisms, which is important to GPs.”

The majority of GP-led activity has been concentrated in Europe. Data from Greenhill Cogent show transactions in the region accounted for 48 percent of that market last year, compared with 40 percent in North America. In a sub-asset class where evolution usually comes from North America – after all, the region accounted for 66 percent of all deals last year – this is surprising.

Jeff Keay, a managing director with HarbourVest, suggests several reasons why this has been the case. “I think it’s the appetite of general partners to explore a transaction that’s not necessarily right up the fairway of what GPs typically do from a fund management standpoint,” he says.

“Part of it may be the profile of the limited partner base of some of the funds where these transactions have taken place; there’s more willingness to manage through the inevitable conflicts that arise.”

Momentum within the region has also played a major role. “European managers have seen their peers pursue those opportunities and that’s lowered the barriers to pursue additional deals. That’s obviously spreading now on a more global basis,” Keay says, adding the balance among geographies is likely to level off this year.

Shontz points out an important structural reason why European GPs are leading this movement: carry. Vehicles with a European-style waterfall don’t take carry until all cost has been returned, whereas those with the American model are taking carry on a deal-by-deal basis. “That creates a real incentive for a GP with a European-style waterfall to accelerate or crystalise the carry through a GP-led transaction.”


These transactions can be an attractive tool for GPs and LPs alike. For GPs, providing additional runway for certain assets that have upside potential, as well as realigning and motivating investment teams are two reasons to consider a GP-led transaction, says Humber.

For LPs, providing a liquidity alternative can be an attractive feature, he adds.“In a situation where a majority of the carry has been allocated to the more senior partners, some of whom may have taken a step back during the life of the fund, a transaction can serve as an opportunity to establish better alignment and incentives on a go-forward basis for the junior partners who have led the portfolio.”

However, all the experts agree the most important thing for ensuring a successful GP-led transaction is looking after the existing LPs.

“Sometimes there is a monetisation event where carry is distributed to the team, so we are very active and very vocal to protect our investors who are in the fund,” says Daryl Li, a director at Ardian, which also makes primary commitments through its fund of funds programme.

“We will negotiate status quo options, making sure existing investors get to remain in the same terms and conditions they signed up for, or if there’s a big carry event, we want to make sure the key people in the team are incentivised going forward, either through appropriate vesting mechanisms or ensuring they roll an appropriate amount of carry into the new fund.”

Li stresses the need for active communication between the LPs, the GPs and the new investors throughout the process. “GPs have an objective or several objectives they want to achieve through this transaction, and LPs are usually understanding as long as you have an open line of communication with them. It’s important to establish that and work out a solution for everybody.”

It is typically preferred to offer a status quo option, but it is not always a possibility, says Shontz, for example if the portfolio needs a capital infusion. “Investors may be faced with the tough situation: do we put in additional capital or do we keep the status quo and have the companies fail, or do we allow some kind of restructuring?”

However, there are creative ways to approach the problem to find outcomes with which existing LPs are comfortable, says Schwartz.

“Often existing LPs who remain in the restructured fund do not want to commit additional capital,” he says.

“One alternative is to recycle distributions rather than require LPs to make additional capital contributions. The GP can use cash that would have ordinarily been distributed to all of the partners, including the status quo rollover partners, and recycle or reinvest such cash in portfolio investments. There’s a lot of creative ways you can structure to have almost a status quo, and I think having a status quo or an almost status quo is very important to getting the deal done.”

Shontz points out that most GP-led situations are focused on mature funds, predicting that in the future liquidity offerings may become standard.

“There are discussions taking place with GPs around building automatic liquidity options once a fund reaches a certain age into limited partnership agreements, and it could become a standard feature that at some point in time there is an offer for all LPs to get out if they want to.”

Schwartz says such liquidity provisions are part of the conversation, though he has yet to see them in widespread use.

This article was sponsored by Ardian, Debevoise & Plimpton, Greenhill Cogent, HarbourVest, Landmark Partners and Partners Group and first appeared in the May issue of Private Equity International.

Stay tuned for part 2 of the roundtable discussion.