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Portfolio Advisors: The GP-led supply-demand imbalance

There is a shortage of buy-side capital for GP-led continuation funds, even though LPs are quickly waking up to the opportunity, say Portfolio Advisors’ Brian Mooney and Stephen Sloan.

This article is sponsored by Portfolio Advisors.

What is currently driving LP demand for GP-led transactions?

Brian Mooney

Brian Mooney: The major driver of LP demand is the dramatic shift to the high-quality end of the spectrum; the GP-led market can now be characterised as sponsors utilising the continuation fund structure to re-buy their trophy assets and to simultaneously deliver optionality to their LPs. Coupled with the shift to high-quality sponsors and assets is a higher return opportunity than traditional LP secondaries and a unique and lowered-risk profile versus other traditional avenues for investing in private equity.

Stephen Sloan: The GP-led market is significantly undercapitalised. There simply isn’t enough capital available to support all of the GP-led transactions in the market.
For LPs that understand these transactions and how GP-led investments can benefit their portfolio, we see them allocating increasing capital to take advantage of both the unique attributes of these investments and the supply/demand imbalance in the market.

BM: LP secondaries and GP-led transactions both have attractive investment attributes, but those attributes are very different from each other. We believe investments in GP-led transactions are fundamentally different than LP secondaries and require different underwriting, due diligence and skill sets. Now that GP-led volume is larger than LP secondaries volume, we see an increasing number of LPs that want to invest in the GP-led market via a dedicated fund and dedicated team that is 100 percent focused on these unique investments.

Why are LPs increasingly focused on having dedicated exposure to GP-led deals in their portfolios?

SS: Some firms that were historically successful in LP secondaries aren’t necessarily best equipped to be successful in GP-led investments. GP-led transactions, particularly single-asset continuation funds and concentrated multi-asset continuation funds, require very deep due diligence and a different approach to portfolio construction and decision-making versus LP secondaries.

What does Portfolio Advisors focus on when looking at these deals?

Stephen Sloan

SS: We focus on partnering with sponsors that have a proven track record and demonstrated expertise in a particular sector and strategy, and a history of success with a given asset. We are not looking to take on ‘new-deal’ risk. The underlying asset needs to have strong fundamentals and a strong management team and a very clear opportunity to continue its proven value-creation strategy.

BM: Alignment is critical for us. We focus on opportunities where our capital is aligned with the sponsor and the underlying management team. The amount of capital that the sponsor and management are proposing to re-invest in a GP-led transaction typically tells us a lot about their conviction. Given the size and breadth of the GP-led market, we also focus on opportunities where we have differentiated access and/or insight into the sponsor and the asset. These angles typically arise through our primary investment programme or our equity co-investment or credit programmes.

Have you observed any interesting trends or changes in deal dynamics?

SS: The best deals are moving faster than ever. For the buy side, that means there are benefits to be had from already knowing the sponsor and the asset – it puts you in a much stronger position. For many of these deals, you are at a meaningful disadvantage if you are starting from scratch.

BM: Given that many of the best GPs in the world are now executing GP-led transactions, access to the very highest quality opportunities is limited. For GP-led investors, having significant primary capital and equity and credit capital can provide an advantage.

In what way do you expect LP appetite for these deals to evolve, and why?

BM: Investment capital in the GP-led market is following the same development arc as it has in other growing markets. Specifically, capital is typically initially allocated to groups that are ‘generalists’ by nature given the limited number of investment opportunities. However, as the market grows in volume and number of transactions, there is typically a meaningful shift in capital allocation in favour of specialist approaches. We believe we are now in this phase of development in the GP-led market.

SS: LPs are now largely familiar with these transactions, the education process has been done, and the industry has accepted GP-led deals as an important part of the market. Many GPs have already completed multiple transactions and our view is that most sponsors will pursue these transactions on a relatively frequent basis. There will be more capital raised for these deals specifically, and the market will move from generalist to specialist. That will favour investors with the right tools, which we think means long-tenured platforms and strong relationships with the key sponsors.

Brian Mooney is co-head of GP-led secondaries and Stephen Sloan is global head of secondaries at Portfolio Advisors