“If to do were as easy as to know what were good to do, chapels had been churches, and poor men’s cottages princes’ palaces.”
So speaks Portia in Shakespeare’s The Merchant of Venice. Knowing what to do is one thing, but actually doing it quite another. Thankfully, alternatives asset management consultancy MJ Hudson has come up with the former in the form of its Catalogue of the Secondaries Market: A Guide to the Sale of Private Equity Fund Interests, as Secondaries Investor reported last week.
The guide includes advice for successful transactions from leading market participants. Below are thoughts on 18 topics from some of the industry’s best-known minds. We’ll leave the implementation to you.
“With creative transaction structures, you no longer have to sell an investment to create liquidity.” Jonathan Abecassis, head of secondaries (EMEA/Asia), Credit Suisse private fund group. On GP-led processes: “If you represent a large portion of a fund, consider proposing a GP-led process to maximise price.”
“Today, nearly every mid-sized to large LP portfolio sale involves some consideration of active or near-term GP-led liquidity offerings. This dynamic has fundamentally changed the type of advice LP sale advisors are called upon to provide.” Sandro Galfetti, managing director, PJT Park Hill.
Fair and equal treatment
“GP-led solutions are inherently conflictual. It is essential, therefore, for LPs to have confidence that the process was fair and transparent.” Pablo Calo, partner, Fairview Capital Group. Incentives also matter: “Ensure you understand the pricing dynamics of all bids submitted, including the incentive scheme provided to management.”
“The secondary market is mature and deep. In a process, it is worth exploring the market very broadly, in order to maximise the outcome for the seller.” Dominik Meyer, managing partner, AXON Partners.
Beware of the buyer
“Make sure you have a credible and experienced buyer who understands the assets before engaging lawyers and negotiating agreements – or you might find yourself in a price renegotiation when it is costly to change horses.” Mauro Pfister, managing director, Capital Dynamics.
“Creating diversity in a sale portfolio by vintage, strategy, size and geography is the best way for a seller to make a portfolio as attractive to perspective buyers as possible.” Sunaina Sinha, managing partner, Cebile Capital.
“Know your reservation price.” Philip Tsai, global head of secondary advisory, UBS.
Time is money
“Set clear timing goals to prevent missing key transaction dates and adjusting closing terms, due to disadvantageous changes in net asset value.” Bill Arnold, director, Duff & Phelps. Talking helps too: “During an offering, sellers often delay interacting with GPs. By engaging with GPs as soon as possible, sellers and advisors can identify and address potential issues, such as transfer restrictions and publicly traded partnership concerns.”
“Make sure your tax and legal counsel has deep experience with secondaries transactions – it helps avoid the many pitfalls and makes the closing process more efficient.” Eduard Lemle, partner, Montana Capital Partners.
Letter of intent
“Ask to see the LOIs that the broker receives, and not just the aggregation.” Markus Benzler, UBS. Also, take your time: “Don’t be in a rush – and if you are, don’t let anybody know.”
Some things never change
“GPs will often restrict changes to their transfer documentation. Ignoring this can unnecessarily delay the transfer process and may mean certain interests fall out of the intended closing.” Megan Lau, MJ Hudson.
Get the full list
“Ensure you have the full list of closing conditions from the fund manager – you don’t want to delay a transfer of an interest because the fees for the GP’s counsel have not yet been paid.” Eamon Devlin, MJ Hudson. Beware of unexpected costs too: “Be as clear as possible when negotiating the assumption of liabilities in the PSA; as seller you won’t want to be hit with an unexpected cost following completion, especially if you have already returned capital to your investors.”
Certainty and speed
“Have a clear understanding of your objectives, as not everything is just about price maximisation. Certainty and speed of execution can also be a deciding factor.” Yaron Zafir, former head of secondaries, Rede Partners. Co-operatives GPs also help: “In less well-known funds, ensuring that the GP is co-operative and forthcoming in providing information to potential sellers can be key to process success.”
“Work with your advisor to develop an ‘offering playbook’. Understanding the steps of a sale process will help prevent unpleasant surprises during and after an offering.” Dan Nolan, director, Duff & Phelps.
“Be aware that the buyer may have its own internal AML that it needs to conduct on you as the seller (and sometimes on the GPs).” Saloni Joshi, MJ Hudson.
Closing takes time
“The deal closing process will require as much of your time (if not more) as the process up to the point of the bid.” Elly Livingstone, partner, Pantheon.
“In a sale of tail-end interests, ensure that the seller is able to give all fundamental reps and warranties, at each closing.” Robert Eke, MJ Hudson.
Stop in the name of NAV
“When a fund generates a big exit at a value significantly higher than the NAV reported on reference date, sellers sometimes decide to stop the sales process.” Etienne Deshormes, chief executive, Elm Capital.