The half yearly reports from secondaries advisors made happy reading this year, with record-high transaction volumes and an explosion in GP-led deals grabbing the headlines. But dig a little deeper and a theme emerges that could prove consequential in the long term.
According to Evercore, the proportion of limited partners that opted to sell in asset sales dropped by 13 percentage points between 2018 and the end of the first half of 2019, from 81 percent to 68 percent. Participation in tender offers also declined, from 39 percent in 2018 to 30 percent. What caused this decline? And is it something to be worried about?
It could just be down to the nature of the deals that have come to market. GP-led processes on older funds, perhaps run by underperforming general partners, are likely to get a strong uptake from limited partners looking for a way out. The decline could be indicative of the higher quality of GP coming to market; even in a high-price environment, LPs are opting to stay the course.
It could, however, be symptomatic of a broader trend. For several years, many LPs have been ill-equipped to deal with the volume of election packages crossing their desks, a situation that has only worsened with the growth of the market. Now that a status quo option has been enshrined as best practice by the Institutional Limited Partners Association, LPs are taking advantage.
“It’s an easy out,” says Sunaina Sinha, managing partner at secondaries advisor and placement agent Cebile Capital. “Often LPs are checking that box and moving on or simply not responding at all.”
The increased sophistication of LPs may also play a role, said one senior buy-side investment professional based in London. Rolling in a restructuring requires an LP to actively re-invest in the new vehicle, a decision that should be based on the kind of detailed analysis that some LPs have not had the resources to do. As more gain the capability, they may be seeing the assets in a new light, identifying the same upside potential as the secondaries buyer.
LPs will always need liquidity and the high bids coming in from buyers can often be too good to refuse. But buyers should probably get used lower LP take up.
What do you think has caused the decline in participation? Contact the author at firstname.lastname@example.org.