We anticipated the rise in GP-led transactions when we made our predictions at the beginning of the year, but here’s what else happened across the market.
GP-led transactions picked up in 2016
Funds that were raised during the pre-crisis boom are reaching the end of their decade-long life cycles, and restructurings and other GP-led transactions are one way to breathe new life into such funds. One notable GP-led transaction was Lee Equity Partners, which closed the restructuring of its 2008-vintage, $1.2 billion debut fund, Lee Equity Partners Fund I, in March. Lee Equity gave its limited partners the choice to sell their stakes in Fund I at a premium, according to reports.
Nico Taverna, head of secondaries at private equity firm Adveq, says he has seen some firms deploying more than half of their capital into GP-led restructurings.
HarbourVest Partners managing director John Toomey, who focuses on secondaries investments, says the quality of restructuring assets has been inching up. “A few years ago, it was mostly distressed managers or distressed assets, but now higher quality managers are getting more opportunistic with higher quality assets.”
This year’s transactions included complex deals such as KKR selling about $400 million of GP commitments held on its balance sheet to two undisclosed secondaries buyers, while retaining a percentage.
Meanwhile, limited partners pushed back on some transactions, such as when First Reserve’s failed attempt to restructure its 2006-vintage $7.8 billion fund was scuppered after the California Public Employees’ Retirement System, described by one source as “an influential and upset LP”, expressed doubts about the proposition.
High levels of pricing tapered
Pricing inched down a bit, particularly in the second half of the year, with flow names trading in the mid 90s and tail-end stakes trading in the 70s. Pricing in venture capital funds was mostly flat to down. “[It’s] an almost bear market in terms of valuations in the VC sector this year,” Hans Swildens, founder of venture-focused Industry Ventures, said.
But the bid/ask spread narrowed throughout the year, contributing to an active dealflow particularly in the second half of 2016.
Sellers had high expectations in 2016, especially in the middle of the year, making closing deals difficult, according to Tjarko Hektor, partner at secondaries firm New 2nd Capital.
Swildens agrees the first quarter was one of the slowest for closing deals. Industry Ventures had more letters of intent outstanding than in any previous Q1, at about $1 billion of purchase price across 25 transactions.
“Through the second to fourth quarters, we had a lot of the sellers come back and sell at less than market rates, so volume picked up dramatically in terms of closed deals,” he says. “It took the sellers three to six months [of] trying to sell to realise the pricing in the market had changed.”
Fundraising reached a new record
PEI data indicates that secondaries firms reached a fundraising record in 2016, garnering $34 billion across 23 funds by 12 December.
That figure doesn’t include Blackstone’s Strategic Partners Fund VII, which reached $7.5 billion in December and is expected to hold a final close before the end of January.
It’s also a whopping 51 percent larger than the $22.5 billion raised in all of 2015, across 17 funds, according to PEI data, and eclipses the $33 billion raised by 31 funds in 2014. These figures indicate how mainstream the secondaries market has become within private equity.
The largest fund, with $14 billion in commitments, was raised by Paris-headquartered investment firm Ardian in April.
Other funds in the top five include HarbourVest Partners’ Dover Street IX, which closed on $4.8 billion and Pantheon Ventures’ Pantheon Global Secondary Fund V, which raised $3.5 billion.