GP restructurings are an increasingly important part of the secondaries landscape, says Adam Turtle, partner at advisory and placement agent Rede Partners.
How important are GP restructurings to the secondaries market as a driver of dealflow?
GP restructurings are part of a secondaries market that is beginning to mature.
The market is very discerning on the fundraising side: there’s a lot of liquidity but it tends to go to a relatively small number of managers, and those can become oversubscribed very quickly.
The rest of the market is quite soft: there are a number of good GPs that will just not be able to raise another fund. When GPs struggle to raise a new fund, the private equity model doesn’t deal with it very well. Management fees start dropping off, the team starts leaving and yet there can be a lot of value at risk for LPs. And that’s the environment for these types of transactions: GPs unable to raise a fund, lots of value at risk and LPs eager to avoid a value-destructive slide. Those situations I think will be increasingly numerous, and while the transaction complexity of doing these is not straightforward, its becoming a more realistic option for many GPs.
How do investors weigh the complexity of approving these restructurings against allowing funds to wind down/be granted extensions?
Each transaction is very specific, because it depends on what the portfolio looks like. If the investor thinks the portfolio is going to get sold reasonably quickly and only needs another one to two years then they’re probably not going to support a restructuring. If the assets require more time, and capital, to maximise value, this would make the rationale for a restructuring stronger. Furthermore, if the investments are relatively passive and don’t require a lot of management from the GP, then they might not be so worried about the team disintegrating.
Each LP base is different and this has an impact. If there are some investors that want liquidity for their own reasons unrelated to the manager, that can create the environment for a sensible restructuring. Alternatively if the investors are very active and frankly don’t need this, it may all come down to the price and whether it is attractive. What is certain is that restructurings will happen in different ways, including whole portfolio sales as well as situations where a significant portion of investors stay in. Indeed sometimes the investors will stay exactly where they are and the GP will change.
Investors will always be very sensitive to making sure that it’s done the right way, that everyone’s being looked after; that there’s nothing underhand going on. Transparency and ongoing communication is essential to ensure a deal is done in the interests of all parties.
How common is it for a restructuring attempt to fail but then be revived at a later date?
Often there can be a first round of enquiries that is unsuccessful, and that reflects that restructurings are relatively new phenomena. GPs aren’t very familiar with the process and neither are LPs. However while it is still early days, the education process is well underway and this will likely assist the execution process.