Amid the emergence of managers specialising in GP-led deals, advisors are still vital in a complex sector with inherent conflicts of interest, according to Yaron Zafir, head of secondaries at London-based advisory firm Rede Partners.
What trends are you seeing in the European GP-led sector this year?
Interestingly, the key trend we’re currently seeing in the GP-led secondaries space is somewhat an echo of the trend that the LP-led space followed over the last decade.
The LP-led market has moved away from being mainly for distressed sellers to one where sellers of all types, not just those in need of liquidity, use it opportunistically to achieve their goals, such as portfolio rebalancing.
Similarly, in the GP-led space, the market is no longer just the realm of fund managers looking to trigger fund restructurings to cope with challenging situations. Instead, we’re seeing a wider variety of GPs considering the opportunities available through these sorts of transactions for themselves and their LPs. In this sense, the market has become more diversified and opportunistic. We’ve seen some fund managers with strong track records reviewing their mature vehicles and considering the possibilities of running secondaries processes across them.
There has also been a growing sophistication in transaction structuring coming into this end of the market, such as the employment of deferred payments and preferred equity structures.
We’re seeing some firms emerge that are specialising in GP-led restructurings. As this trend continues, how do you see the role of the advisor evolving?
There is general acceptance today among all market participants that having an advisor is critical for executing GP-led restructurings successfully, given the deal complexity and inherent conflicts of interest. In this respect, I see the importance of the advisor as only likely to increase.
More than anyone else, buyers specialising in these transactions have a strong incentive for advisors to have an active role in this market, as this as an important source of dealflow for them. While GPs will typically have heard of some of the larger generalist secondaries buyers, they often will not recognise smaller buyers that may offer a more bespoke solution or better terms. As smaller and more specialised buyers proliferate, having an advisor who is well informed about the cartography of the secondaries market is vital to making the connections between GPs and these players.
While on the LP-led side quite a few buyers prefer to avoid advisor-led auction processes due to the highly competitive pricing in such transactions, this is typically not the case for GP-led transactions where competition, while it exists, is less fierce.
Which segments of the sector are you excited about?
The secondaries market for managers that have been previously backed by non-institutional capital or by corporates is particularly interesting. There’s a constant flow of new firms starting off this way without institutional capital as it’s easier for them to raise money and gives them greater flexibility.
Eventually, quite a few of them think about the next step for their franchise and that usually means raising external LP capital. Many of them are very good investors, but a lack of experience of working with this kind of investor makes fundraising challenging.
Executing a secondaries transaction around existing portfolios is a great way for these GPs to establish relationships with the institutional LP universe, while allowing their original backers to take some money off the table. Rede has successfully executed several transactions like this over the last 12 months.
Furthermore, with banks not sponsoring new managers, family and corporate capital has become an important source of money for new GPs. I expect to see more of these firms coming to market with secondaries transactions to establish institutional LP relationships. It’s a growth opportunity we’re paying close attention to.