It is happening: the prediction that highly regarded managers would start tapping the secondaries market is becoming reality.
Last Friday we broke the news that Swedish buyout stalwart EQT was running a stapled process involving stakes in its strong-performing 2011-vintage flagship fund and a commitment to its latest Asia-focused fund.
It is an interesting deal – being run by the GP itself rather than an advisor – and worth looking at more closely.
Partners Group – the chosen buyer among a select group that EQT approached – is offering an 18 percent premium on a 31 March valuation date, according to two sources familiar with the deal. A little more than the 14 percent premium offered to LPs in BC Partners’ ninth fund in one of the summer’s other high-profile stapled deals.
Could the selling LPs have achieved a higher price from alternative buyers? On its own, a sole LP would have to either find a buyer (which may result in a lower price as the size of the deal would be smaller), or hire an advisor and incur administrative burdens as well as fees. A burden perhaps, but not an impossible task. Secondaries Investor is aware of at least one LP in EQT VI which says it was contacted by an interested buyer offering a higher price for its stake.
It now also appears that Fund VI wasn’t the only existing fund EQT offered secondaries stakes in – the firm had originally presented a basket of seven equity funds with minimum volume of net asset value purchase requirements for each vehicle. Whether Partners is acquiring stakes in funds additional to EQT VI remains unclear, and both Partners and EQT declined to comment for this piece.
The ‘why’ is unclear
A question remains regarding EQT’s motivation: how much did the firm need a boost to help it over the fundraising line for its Mid Market Asia III vehicle, for which it is seeking up to $800 million? The vehicle was registered with the UK’s Companies House in November 2015 and official fundraising began the following March, according to a source familiar with EQT, so it has been in market for around 17 months.
GPs don’t arrange staples for fun, says Yaron Zafir, head of secondaries at Rede Partners. “Arranging a liquidity process for the benefit of the LPs does consume some time and effort from the GP. People understand that if GPs undertake this, they should have some incentive from it as well.”
Looking at staples more broadly: there are potential conflicts to be navigated, but market sources are quick to point out that at the end of the day LPs are not forced to sell their stakes. When a GP runs a process and selects a buyer whose price reflects an agreement to make a primary commitment to a fund the GP is raising, is there a risk selling LPs lose out? The answer to this lies in transparency and optionality. If the GP is up front with LPs that it is running a stapled deal, and if the offer is purely optional, LPs are not drawing the short straw.
With the US Securities and Exchange Commission shifting its focus to secondaries deals again, LPs wanting to get better pricing or better terms will do well to ask as many questions as possible and flex their muscles.