There’s a perfect storm brewing in private markets currently and the secondaries market is providing a compelling route out to calmer waters.
Sun Capital Partners is the latest North American firm to emerge as exploring a tender process plus staple, affiliate title Buyouts reported earlier this week. Sun Capital is letting investors in Fund VI and VII cash out of their stakes in the pools. The process also would include a staple of fresh capital into Fund VIII, which has been in market since last year targeting around $2.5 billion, according to a regulatory filing.
Harvest Partners and The Carlyle Group are also running similar processes, with Carlyle having already closed on a tender offer plus staple deal earlier this year. Secondaries Investor is aware of at least three other firms considering stapled processes.
That these processes are back in vogue shouldn’t come as a huge surprise. LPs are trying to work through a long list of GP names that have come back to market at a time where they’re contending with the denominator effect on their portfolios, meaning they’re both overexposed to private equity and need cash to re-up in funds. In this environment, stapled tender transactions can provide a way for GPs to reach their fundraising targets.
Stapled deals can be a powerful tool for GPs. For some sponsors and their investors, stapled tenders represent their first foray into the world of secondaries. A successful outcome could open the door to both parties’ participation in future secondaries transactions, Sameer Shamsi, managing director and head of secondaries at Houlihan Lokey, tells Secondaries Investor.
Don’t expect a flood of managers that are successful in running tender processes in the current market. Although these transactions offer an opportunity for diversification for secondaries buyers, liquidity is at a premium and buyers are being choosey in those deals they’re willing to back, sources tell us. Secondaries Investor has heard of one GP that came to market to test a potential tender only to opt not to run a process as they weren’t able to negotiate pricing to a level where it would make sense for LPs to sell.
European GPs are taking a slightly more cautious approach to these transactions, according to a Europe-based adviser, who said they hadn’t seen a “big push” for stapled deals in the region. Just one of the processes they are bringing to market in the coming months has a staple process, and even then they are not sure they will impose the staple. “There is clearly a worry among European GPs about a staple being a ‘hard’ ask on the deal – and potentially impacting pricing achieved as a result,” says the adviser.
It may seem like the perfect antidote to a GP’s fundraising woes on paper – allowing LPs to access liquidity while ensuring a commitment to a new fund. A successful process isn’t a given for every manager, however. With pricing key to getting many of these deals over the line, expect staples to be completed by the best of the best.
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