Click here to read our piece on the first two elements – carry concerns and valuation dates – published in July.
Secondaries buyers who are on the fundraising trail may not want to show prospective LPs their unrealised losses on stakes they have recently bought at a premium. From a near-term accounting perspective, buying at a discount incurs an immediate unrealised gain on the investment because buyers can mark the portfolio at the net asset value given by the GP.
“For buyers in the middle of fundraising, there may be a particularly heightened level of sensitivity for those buyers to pay a premium to NAV for a transaction,” says Phil Tsai, global secondary advisory head at UBS. “Buyers don’t necessarily want to go to a potential investor meeting soon thereafter and explain their rationale for the premium paid, as well as have their return profile hampered by an immediate unrealised loss upon closing of a premium-priced deal.”
If the GP seller of a fund stake is fundraising itself, it tends to be more bullish on the future of its assets to woo LPs.
“It’s natural that fund managers take a more positive stance when they’re busy marketing and looking at things in a more ‘glass half-full’ way,” says David Atterbury, managing director at HarbourVest Partners. “Buying a fund when somebody’s fundraising, you have to be aware of that and make sure you’re considering things with a long-term perspective.”
When a fund is in harvesting mode, a GP selling an asset before a deal closes can have implications for both buyers and sellers. There is always a dollar-for-dollar adjustment to the purchase price to account for this, so an exit from the fund means the buyer will not be deploying the same amount of capital it originally agreed to. In an environment where buyers need to put money to work, this can be frustrating, says Gabriel Boghossian, partner at law firm Stephenson Harwood.
It can impact sellers too — if the crown jewel of a fund is sold pre-close, a smaller or non-commercial seller may think it is not worth their while to incur intermediary and legal costs as well as waste management’s time, as the deal may have dropped below a critical size.
“A secondaries deal is still not just pressing a button, there’s a sale and purchase agreement, a negotiation, lawyers and potential press,” Boghossian says.
Brexit, the weak pound, interest rates – all factors that may throw affect a buyer’s or seller’s willingness to continue on with a deal. While it is difficult or near impossible to predict macroeconomic events, being aware of how they may affect a process is key, and closing deals quickly will minimise the impact of any potential events.
“Until the ink is dry on the sale and purchase agreement, there is always the risk that due to some unforeseen event one of the parties walks away or tries to renegotiate,” says Johanna Lottmann, a director in Lazard’s Private Capital Advisory group. “Once buyer and seller have agreed on a price, as an advisor you try to be as quick as possible to close the deal.”