In this final excerpt from sister publication Private Equity International’s April roundtable, executives from Debevoise & Plimpton, AlpInvest Partners, Ardian, Greenhill Cogent and HarbourVest Partners discuss the evolving nature of GP-led deals and what’s in store for the space in the years to come.
GP-led transactions, although more time-consuming and involving more parties than portfolio sales, are quickly gaining steam and offer secondaries buyers the ability to secure higher returns in a less competitive environment.
This segment of the secondaries market is estimated at as much as a quarter of deal volume, and industry participants who gathered in the New York offices of Debevoise & Plimpton agreed the space is rapidly evolving.
“What we’re seeing, in particular in Europe where I’m based, is more complex transactions,” says Kate Ashton, a partner with Debevoise & Plimpton. “There are lots of funds looking for a liquidity solution with the GP; or a sponsor wants to placate a certain group in the investor base; or the sponsor wants to look for investors who can help them in the long term.”
With GP-led transactions, the goal is not only to acquire a fund stake and become a new LP. It is also about being a long-term partner to the GP and having the possibility to provide primary capital down the road.
These transactions are more complex because they involve several parties: all the LPs, the GP and at least one secondaries buyer. Historically, they were associated with GPs unable to raise money in the primary market and therefore had a certain stigma attached to them.
But this is changing. As these transactions have evolved, the quality of the GP and of the underlying assets has continued to increase and it’s now common to see GPs having successful fundraising after a secondaries deal. Perhaps because of the extra concentration and lack of diversification compared with fund stake portfolio sales, GP-led transactions exemplify the fact that the secondaries market resembles that of direct investing.
The participants all agree that with secondaries in general and GP-led transactions in particular, a good investment opportunity is one with strong assets in the underlying portfolio companies, and a quality GP.
“Every secondary is just like a buyout, you make 50 percent of your decision on the assets and 50 percent is on the management team,” says Wouter Moerel, a managing director with AlpInvest Partners. “The management team is your GP and the assets are the companies.”
Greenhill Cogent managing director Chris Bonfield explains that GP-led transactions can come from the desire of a GP to jump-start fundraising, gain additional time and/or capital to support the existing portfolio through a fund restructuring, or simply create an organised liquidity option for LPs on a fund that is very mature.
With direct secondaries and especially spin-outs, industry participants say the quality of the GP has typically been higher, because the transaction is less about poor performance and more about regulatory pressure – such as banks have experienced since the introduction of the Dodd-Frank Act.
As the quality of GPs is increasing and best practices are developing, even Ardian, which initially avoided GP-led restructuring, has completed a couple of such deals in the past few years but only in the form of tender offers.
Direct secondaries and particularly spin-outs of financial institutions are a lot more common for Ardian than restructurings, representing on average 20 percent of any given fund, Ardian managing director Vladimir Colas says.
HarbourVest for its part has been active in direct secondaries, buying portfolios of companies from funds or other direct investors. Direct secondaries and other less traditional secondaries represent the majority of transactions within its portfolios, says Jeff Keay, a managing director with HarbourVest Partners. Regardless of the transaction type, the quality of the manager is always of importance.
“What’s critical to us is ensuring there’s proper economic alignment. Specifically, there needs to be a shared view of success between the manager and the investors,” Keay says. “Our ability to be a good partner both in executing the secondaries transaction but also in supporting team over the longer term are some of the factors that can differentiate us as a counterparty beyond price. We love that part of the market and we think there are a lot of inefficiencies in terms of deal dynamics that play in our favour.”
What’s in store for GP-led deals in the next few years?
Some of the roundtable participants, like Moerel, expect that there will be a cyclical economic downturn in the next year or two, albeit not as bad as during the global financial crisis, likely making the LP portfolio market more attractive again as leverage becomes harder to obtain and pricing tends to reduce. Others reckon a private equity household-name firm will likely undergo a GP-led transaction, further democratising these types of deal.
“To the extent that bigger names, stronger funds are seen starting to use the secondaries market, particularly the GP-led secondaries side, that may open the floodgates,” says Ashton. “Once you have a really top name doing a GP-led transaction … that could lead to even more players coming in and looking for liquidity.”