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The five things Lexington looks for in a GP-led deal

The secondaries giant was expecting a first close on its LCP X flagship in the third quarter of this year, documents seen by Secondaries Investor show.

The way Lexington Partners selects which GP-led secondaries transactions to invest in has been disclosed in a document seen by Secondaries Investor.

The New York-headquartered firm, which last week said it had agreed to be acquired by asset management giant Franklin Templeton, evaluates potential deals by “deal fundamentals” and “process dynamics”, according to the document, dated October 2021, which details the firm’s investment strategy, firm make-up and selected transactions.

Lexington looks at the following five deal fundamentals:

  • High-quality GP with established track record
  • Meaningful value appreciation potential
  • Negotiated transaction terms and structure
  • Attractive risk-adjusted return profile
  • Meaningful GP incentive/alignment

When it comes to process, Lexington evaluates five key areas: having a long-standing and trusted relationship; a differentiated information and GP access; fair pricing for Lexington, existing LPs and GP; a large deal size with the ability to syndicate, and true liquidity option with status quo/roll option for LPs.

Lexington, which is seeking $15 billion for its 10th flagship secondaries fund, was expecting to hold a first close on the vehicle in the third quarter of this year, the document shows. It is unclear whether this has occurred.

LP fund stake deals accounted for 64 percent or $5.92 billion of completed transactions in its 2018-vintage LCP IX fund, according to the document. GP-led deals accounted for 29 percent or $2.64 billion, with “opportunistic” transactions – direct secondaries, equity co-investments, hedge fund deals and preferred equity transactions – at 2 percent.

Five percent of the fund’s completed transactions, or $493.7 million, were primary commitments, numbering 133.

A spokesman for Lexington declined to comment.