The view from London

Why cash-rich LPs are a problem and other themes European advisors are buzzing about.

The secondaries market has truly ‘gone global’: deals today can involve buyers, sellers and assets from all around the world. But the bulk of transactions are still being worked on out of two main financial hubs: New York and London.

This week, I’ve been in London busily meeting numerous market participants that help shape the secondaries industry. Here are three themes that the advisory community in particular was buzzing about:

1. GPs increasingly view secondaries as a fundraising tool.

The traditional primary fundraising model is said to be verging on broken, with often good-quality and well established funds taking much longer than anticipated to raise money. Now, some groups are using GP-led restructurings with staples as a tool to drive interest and speed up the fundraising process.

“The financial penalty for late comers simply isn’t high enough anymore,” said Nicolas Lanel, managing director and European head of private capital advisory at Evercore, referencing some LPs’ ‘wait and see’ approach to the traditional fundraising process.

“GPs are increasingly turning to the secondary markets to trigger that often elusive first-close via stapled transactions and generate early momentum in their fund raise.”

2. European GPs are more reticent to embrace restructurings.

GP-led restructurings are a rising trend in Europe just like in the US. In the US, one recent deal has involved KRG Capital Partners conducting a tender offer with its LPs. In Europe, some recent restructurings have included PM & Partners in Italy, while a transaction involving Spain’s N+1 is in the midst of being completed.

But at least one advisory firm has noted that GPs in Europe have a tendency to be less aggressive in pushing in that direction than their US counterparts, mainly because they see a strong stigma attached to going through a restructuring that US GPs have now overcome.

“US GPs are more entrepreneurial,” said a market participant in London. “It’s a bit tougher here because GPs are more cautious.”

3. LPs are flush with cash – and that’s a problem.

This isn’t a problem specific to Europe, but one that several of my sources have brought up during my stay in London. You would think that one can never have too much cash but for many LPs, especially pension funds and insurance companies in both Europe and the US, that’s a problem. And it’s now impacting the secondaries market.

Distributions have been high and GPs have been returning loads of cash to LPs, which in turn have to reinvest it and may not always have the resources to do so. Despite the secondaries market being a sellers’ market with high attractive pricing, many LPs are simply sitting on the sidelines to avoid having to deal with even more cash coming in.

“Realisations from private equity are at record high, and even LPs who want to sell are not,” said Sunaina Sinha, managing partner at Cebile Capital. “They’re flush with cash and need to find somewhere to put it. They’re having a big cash deployment issue.”

What’s your view? Get in touch at marine.c@peimedia.com. We’ll continue to follow these trends as they develop further so stay tune for more coverage in the weeks to come.