With restructurings and stapled deals set to be increasingly common and to take place in ever-larger funds, ensuring such deals succeed is vital, since a transaction can fall through after months of work and due diligence.
Speaking at a panel discussion on secondaries at the British Private Equity and Venture Capital Association Summit 2015 in London last week, Pinal Nicum, a partner at Adams Street Partners, said that from a buyer’s perspective there are three elements to ensuring such deals close:
1. Identifying value in the fund’s assets. “There need to be some value drivers in the portfolio,” Nicum said. Although market timing can be a big value driver, it can’t always be the only one. Value in a fund’s assets can also come from growth in certain industries, acquisitions made by a company held in the fund, or specific regions that may be experiencing growth.
2. Valuing the portfolio in a fair way. A deal won’t work unless all parties feel they’re getting good value. “An LP is not going to make an easy sell decision if they’re presented with a sizeable discount on the transaction,” Nicum said. “There needs to be a fairly-balanced valuation of the portfolio. Why these deals collapse is usually around the valuation, at least at early stages of the transaction.”
3. Having a committed GP. Buyers must ensure the manager is committed to making realisations over a reasonable period of time or investing in the deal won’t be worth it.
These three elements can help to make transactions win-win-win for all parties, Nicum said.
Adams Street has been active in restructurings and stapled deals this year. In September, the firm bought stakes in Core Capital Partners’s latest fund in a transaction where Core Capital liquidated its first fund and transferred remaining assets into a new fund.
In August, Adams Street increased its exposure to two tail-end Palamon Capital Partners funds and committed to the firm’s new fund as part of a stapled deal involving five major buyers, Secondaries Investor reported.