LPs scrutinise GP-leds

There is misalignment between investors and GPs on the topics of obstacles, red flags and expectations, a Capstone survey finds.

There is a significant gap between GPs’ and investors’ respective priorities and concerns when it comes to GP-led transactions, research has found.

The number of GP-led transactions LPs are reviewing has increased sharply this year, according to the survey conducted by Mizuho-owned placement agent Capstone Partners. Around half of LPs surveyed said they reviewed more than 10 transactions in the first half of 2022. By comparison, across the whole of 2021, 67 percent of LPs reviewed fewer than 10 transactions. Just 19 percent of LPs have a dedicated secondaries team, with 58 percent indicating secondaries­ were done by their primary teams.

For LPs, no carry rollover was seen as the biggest red flag in GP-led transactions, with the majority saying reinvestment of carry was the number one priority with the launch of a GP-led process. Misalignment and a lack of motivation, or the wrong motivation, were also red flags, according to the survey of 110 global participants, including GPs and LPs.

By comparison, just 7 percent of GP respondents cited no carry rollover as a red flag. While in the minority, 28 percent of GPs signalled they are unwilling to substantially roll over the carry. GPs’ assumptions of LPs’ largest red flags were no competitive pricing, conflicts of interest and misalignment.

Answers also differed for the main challenges GPs face in such transactions: GP respondents said the biggest obstacle is conflicts of interest, followed by co-ordinating different stakeholders and the challenges in dealing with LPACs and existing LP management.

LPs listed dealing with LPACs and existing management as a perceived top challenge for GPs. Fifteen percent of LPs said a challenge for GPs was that GP-leds can be a distraction, while no GP respondents gave that response.

More than one-third of LPs surveyed said they anticipated that GP-led transactions would have a negative impact on future fundraising, with just 9 percent indicating they expected such transactions to have a positive impact. No GPs indicated GP-leds would have a negative impact on fundraising.

‘Fair valuation’

Such findings speak to the evolution of the GP-led market, Capstone managing partner Steve Standbridge told Secondaries Investor.

“GPs assume that the first thing that LPs are going to worry about is valuation, and this concept of conflict that they’re trying to pull the wool over their eyes,” Standbridge said.

LPs view these transactions from a different angle. While getting the highest valuation is important from a fiduciary perspective, they get “comfort if they know that the GP is all in, that they’re rolling their carry, that they may be rolling their investment”. LPs that are selling will “put a little bit more scrutiny on it, but if they see GPs participating and rolling carry, their belief is that they’re probably getting a fair valuation”.