Limited partners in crisis-era buyout funds that are yet to hit their GP catch-up phase should consider pushing for a secondaries process, according to research by Hamilton Lane.
Around 18 percent of buyout funds of vintage 2005-08 are at or near their hurdle rate, equivalent to $45 billion in net asset value, the research noted. Many of these funds won’t make it through the GP catch-up period, meaning no more distributions for LPs. According to EMEA secondaries head Richard Hope, LPs should consider asking the GP to run a process to allow for an orderly exit.
“Investors [in these funds] get their money back plus an annualised return, then GPs get a share of the profits before investors get the residual,” he said at a seminar held by the firm in London on 24 October. “If you’re an investor you’re probably looking at a scenario where as more companies are sold, you’re not going to get those distributions because they are paid out in the catch-up profit share.”
Whether these funds are able to pay all their GP catch-up depends to a great extent on how much NAV is left in the fund, Hamilton Lane noted. A fund at the point of preferred return with 45 percent of NAV remaining has to mark up the value of its assets by 1.3x to fully pay GP catch-up. A fund with 5 percent remaining has to mark up its NAV by 3.3x.
“We’re not saying that it has got to have that 7-9 percent IRR in order to kick of a restructuring. But we think it’s an area LPs should be thinking harder about rather than waiting and seeing what happens,” Hope told Secondaries Investor.
Of funds undergoing GP-led restructurings, the proportion of well-performing ones has increased, the data show. In 2015 all the restructuring opportunities viewed by Hamilton Lane’s secondaries business had yet to hit their hurdle. In 2017 around 65 percent of funds to undergo restructuring were above that preferred level.