Limited partners participating in a GP-led process should consider more than just price when deciding whether to sell their stake in a fund.
Speaking on a secondaries-focused panel at the British Private Equity and Venture Capital Association Summit in London on Thursday, Steven Nicholls, a partner with Hollyport Capital, said there are situations in which LPs should opt for a bid with a stapled commitment over one without, even if that means a lower overall price, as the cost borne later could exceed that borne now.
“It is justified that someone will take the lower price for the secondary piece to support that GP getting their fund raised,” he said. “At the end of the day, if that GP doesn’t raise the new fund and doesn’t provide liquidity for you, the existing LP, you’re stuck… you could be stuck back in a zombie situation, which would be like the old days.”
Nicholls added that ideally, these situations wouldn’t arise as the GP would make it clear from the start that it is seeking a staple.
The highest bidder for the secondaries component is often the one most willing to make the staple, added Yaron Zafir, head of secondaries and transactions at placement agent Rede Partners.
“For them [the high bidder] the staple is a great way to ensure the stability of the franchise of the GP,” Zafir said. “There are some secondaries investors where the stapled element actually allows them to underwrite the secondary transaction at a greater price because of the multiple benefits from the staple.”
The panel, which discussed issues and trends in GP-led deals, also comprised Glendower Capital partner Chi Cheung, Debevoise funds partner John Rife, and InvestIndustrial’s head of investor relations Carl Nauckhoff.
GPs have been able to generate staple ratios of 2:1 or better where the primary capital is seen as accretive to the overall transaction, according to Campbell Lutyens’ 2018 Secondary Market Overview. Survey respondents who closed a GP-led transaction with a primary staple last year had an average ratio of approximately 3.4:1 secondaries to primary capital, the report found.
GP-led transactions comprised 26 percent of the $27 billion in secondaries deal volume seen in the first half of this year, according to advisor Greenhill’s first-half report.