Solving price and structure challenges in GP-led deals

Brad Critchell, who joined investment bank Hycroft in May to focus on GP-led solutions, recently spoke to Secondaries Investor about restructurings. He discusses why not all such deals succeed and why being actively engaged with advisory boards and councils is the best way to ensure success in a complex transaction.

Which type of deals do you see leading the GP-led space this year?

The closer we get to boom-era funds entering the end of their harvesting period – and we’re coming up on that – the more we’re going to see a regular variety of transactions: the tender offers, the GP-facilitated secondaries and so forth.

You don’t have to do a full-fledged restructuring, per se, often until you’re through the fund’s life and maybe even through the fund’s extension periods, without other factors. I believe we are going to see more of the intermediate step – which is essentially the GP-facilitated secondaries sales – simply because the calendar works that way. If you have a 10-year fund that you raised in 2006, 2007 or 2008, you should be thinking about that now.

As that market evolves, we want to get to a place where no one’s compelled to do anything. The nice thing about a tender offer is an LP who wants to sell can sell, and an LP who doesn’t want to sell doesn’t have to sell, and no one’s worse off as a result.

As our industry continues to evolve, as LPs realise the power they have and as market norms continue to develop, we’re going to get to a place where restructurings are an accepted feature of the landscape and they’ll [happen] in such a way that LPs are left better off, the GPs are left better off and the secondaries capital providers can earn an acceptable return. We’ve made progress toward that goal already.

The ultimate answer to some of the conflicts around restructurings is for limited partnership agreements to be flexible, and for limited partnership advisory boards and councils to be engaged, active and willing to work together. If you do that, I think you can come out with good solutions for everybody.

Isn’t whether a deal succeeds or not just a matter of pricing?

The short answer is yes, of course, but the way you get to the right price, the right transaction structure and the right outcome is by setting up things in advance.

For example, there was a prominent restructuring deal that was voted down a couple of times by the LPs because the price wasn’t right. By voting it down, they got to a price they wanted. Other prominent deals have seen successful negotiations around the management fees, if any, that LPs who are rolling over have to pay. That’s effectively a better price too.

If you get to a better price, you’re better off, but that’s the reason you band together, that’s the reason the LPAC is engaged.

The success rate is not 100 percent, nor should it be – these are complex deals with lots of parties at the table.

What are some of the biggest challenges you face when working on GP-solutions?

Getting everyone comfortable with the price when you have multiple parties at the table. Getting LPs’ attention, depending on what you’re trying to do. Getting them engaged to think about something that is still relatively novel.

Coming to a meeting of minds around price and structure when you’ve got multiple parties at a table is the biggest single [challenge].

Then there’s the fact that it’s a new transaction type – you are inventing things, often, and any time you do that, it’s a lot harder than copying and pasting something from a previous deal.

Then you do have some odd things – if you have old limited partnership agreements, the way collective action works may or may not be clear, and there’s a variety of technical things. There’s a reason why a lot of these deals are just talked about – it’s because there are a lot of things that can trip you up along the way.