Lower distributions push more LPs to sell in GP-leds – survey

More LPs in Asia-Pacific are willing to cash out in a sponsor-initiated process to accelerate distributions than their North America and European counterparts.

The slower pace of distributions is leading more investors to tap the secondaries market for additional liquidity, research from placement firm Capstone Partners has found.

Between 50 percent and 66 percent of respondents said that the lower DPI environment would make them more inclined to cash out in a GP-led transaction, according to Capstone’s Low DPI Environment and Impact on 2023 report.

This is evident across all geographies, with more LPs based in Asia-Pacific indicating that they would do so (66 percent), compared with LPs in North America (52 percent) and Europe (61 percent).

“It’s a fact that liquidity is an issue, Aude Pouradier Duteil, a principal at Capstone, told affiliate title Private Equity International.

“We are also in a market that is very creative and nimble. It can take time to create instruments to deliver liquidity to LPs but GPs will find a way either via the secondaries market or other types of financing and liquidity instruments such as NAV financing.”

“These are all tools in a GP’s toolbox but that doesn’t mean that it would fit in any market conditions. It’s really up to the GPs to use what’s in their toolbox and select the one that is the most applicable and that which will be meaningful for their LPs,” she added.

As ICG‘s chief executive and chief investment officer Benoît Durteste said on the firm’s full-year earnings presentation in May, the dealflow for GP-leds is “immense” given that the current environment is characterised by uncertainty around valuations.

In Capstone’s survey, European and North American LPs indicated a rating of 3.4 and 3.25 respectively on low DPI affecting their allocations this year, while concern about a recession was the most impactful market element on Asian investors’ allocations, with a score of 3.

Participants were asked to assign a rating between 1 to 5, with the former having less impact and the latter more impact.

The denominator effect, which was most often cited in discussions in the second half of last year, has slipped in importance, according to the report.

For new relationships, more than two-thirds of LPs across regions said they expect a DPI of up to 0.25x on the prior fund. For existing relationships, expectations for DPI is high among LPs in Europe (46 percent) and in Asia-Pacific (41 percent). Meanwhile, LPs in North America put greater importance on strong portfolio company performance than DPI on previous funds.

Pouradier Duteil also noted that LPs have become more picky, building in additional layers of complexities around requests towards their GPs in the fundraising process.

“LPs asked for co-investments or secondaries sweeteners beginning around 10 years ago to push GPs to the finish line for a primary ticket. Since covid, we see that these two elements are no longer sweeteners but are a prerequisite.”

She added: “In the past 18 months, an additional layer has been, ‘Where is my seeded portfolio?’ LPs would say: ‘ If I don’t have assets for a new relationship, that would be difficult for me to give you any primary ticket’. Another layer added is the Article 8 or 9 [EU ESG and sustainability classification] request. And now, it’s all about realisations.”

More than 360 LPs participated in the study, which was conducted in the second quarter of this year.