Liquid refreshment

Sister publication Private Equity International gathered four buyers, an advisor and a lawyer to discuss the state of the secondaries market.

Here are five takeaways:

GP-led deals may prompt changes in LPAs

So far, GP-led transactions have focused on mature funds, but participants at the roundtable predict – with the market evolving fast and processes becoming more acceptable – that offering liquidity to LPs might become standard. A fund might get to year 10 or 12 and automatically engage in a liquidity offering for LPs that want out. There are already discussions taking place about building these features into limited partnership agreements, said one managing director.

There’s (almost) always a status quo option

If there’s no need for capital infusion in a GP-led deal, a status quo option will be offered to LPs. It gets tricky, however, when new money enters. One participant noted that you might sometimes see two waterfalls; a “status quo” option, where existing investors keep their set-up; and a re-cut waterfall with the new money. “There’s a lot of creative ways you can structure to have almost a status quo,” he said.

Energy is picking up steam

Volatile oil and gas prices meant bid-ask spreads on energy-focused funds have been wide for the past few years, so deals weren’t closing. But that changed in 2017. “I think you have a large universe of limited partners that have exposure to energy that have gone through a very volatile environment and are looking to de-risk, so that has created a significant amount of supply,” said another investment professional. With improved pricing and a more stable oil price, “it’s been a very active space for us in the last 12 to 15 months,” they continued.

Large deals will become larger

As fund commitments in the primary market become bigger, this is slowly being reflected  in portfolio stake sales. “Previously in a mega-fund, the biggest equity cheque would be $500 million,” said a roundtable participant. “Nowadays we’re seeing investors that can speak for $750 million or even $1 billion primary commitments. That is naturally going to drive an even more active secondaries market going forward.”

Buyers favour syndication over club deals

Firms that have the capacity would typically rather be the sole purchaser of an LP portfolio, but are more likely to co-operate with other buyers on GP-led deals. For portfolio purchases, they are typically syndicating parts of the deal to LPs interested in co-investments. “I would say for us as a buyer, we prefer to take down a portfolio and then syndicate it to our investors,” said another buyer. “There’s a lot of demand for secondaries co-investment paper and we are mindful of that.”

Watch out for the full roundtable discussion, which will be published in May.