Providence Equity is giving limited partners in older funds the option to cash out of their stakes in a process that would also include a shot of fresh capital into the firm’s new flagship fund, which has been raising since last year, three sources told affiliate title Buyouts.
Providence’s process, a tender offer plus staple, is among a handful run by GPs who are raising funds in the stubbornly challenging environment. Such deals so far have not received an enthusiastic reception from LPs, who are reluctant to sell at the discounts demanded by buyers.
LP tenders represented only about 7 percent of the $111 billion of total market volume last year, according to Greenhill & Co’s 2022 volume report. There is an expectation that tender activity will increase as GPs look for ways to deliver liquidity back to LPs as exits slow, and at the same time boost fundraising in the sluggish environment.
Providence is running the process on its Funds VII and VIII. The tender is in its early days, which means the firm is working on finding a buyer or buyers who are offering a strong price for LPs’ stakes, as well as a staple into Fund IX. The firm is working with PJT Park Hill on the process.
Providence launched Fund IX last year, with a target of $6 billion, sources said. The firm filed a Form D fundraising document in August, which indicates the fund held a first close, though it is not clear on how much.
Fund VII, which closed on $5 billion in 2013, was generating a 2x total value multiple and a 22.19 percent net internal rate of return as of 30 September, 2022, according to information from Washington State Investment Board. And Fund VIII, which closed on $6 billion in 2019, was producing a 1.2x multiple and a 16.66 percent IRR as of the same date, according to Washington’s information.
Providence ran a larger tender process in 2018 led by Canada Pension Plan Investment Board, with participation from investors including HarbourVest Partners and StepStone Group, Buyouts previously reported. That deal, which gave investors in the firm’s seventh fund the option to cash out, was expected to achieve around $900 million of LP sales, or about 15 percent LP sales uptake, according to the story.
Tender offers so far have proved challenging as LPs are mostly choosing not to sell at discounts. The standard discount is around 15-20 percent, according to sources and market surveys. Last year, average pricing for LP sales was 81 percent of net asset value, an 1,100 basis point decline from 2021, according to Jefferies full-year secondaries volume report.
While buyers have generally looked for around 15-20 percent of the LP base to sell in such transactions, more recent deals have seen less than 10 percent of LP selling uptake. In some cases, even under 5 percent. Carlyle Group’s tender offer process on its seventh fund saw only around 2 percent of LP selling uptake, sources told Buyouts.
Other tender deals in the market include those run by AE Industrial Partners, Sun Capital and Oak Hill Capital.
Tender offers represented about 5 percent of GP-led market volume in 2022, according to Lazard’s full-year secondaries volume survey. Total secondaries volume came in around $102 billion in 2022, Lazard said.