Timing is everything, as the saying goes. In secondaries, it can mean the difference between a successful deal and a failed one. We examined five key concerns for buyers and sellers when closing a transaction for the upcoming secondaries special in the September issue of sister publication Private Equity International. Here’s a sneak peek at two of them.
Buyers need to take account of the impact of carried interest on a fund they’re buying into, and its timing, on the underlying portfolio’s cashflows. If a fund is about to go into carry and catch-up, that can mean a gap in the cashflow for the secondaries buyer as the GP gets caught up. “You’d have to be very aware of that and think about the timing of the cashflows,” says David Atterbury, managing director at HarbourVest Partners. “People can get it wrong if they don’t model right down to that level.”
Whether a fund will ultimately hit carry is also a concern, and buyers should be aware of the GP’s alignment, their motivation and ability to realise assets in a fund. This is even more pronounced when looking at a manager that only has one fund, as a buyer should be concerned about that team staying together, Atterbury adds.
Timing a deal between net asset value reporting dates and closing can be critical. It’s in everyone’s interests to secure a deal before the next set of net asset values comes out and potentially change the dynamics, says Mark McDonald, global head of secondaries advisory at Credit Suisse’s private fund group. As GPs’ reporting to their investors has improved substantially in recent years, it reduces the risk of surprises. But they can still happen and waiting too long to close a deal can result in information – such as expectations of an upcoming IPO or an adverse change in a portfolio company’s revenue – that changes the seller’s or buyer’s perspective on pricing and may put the whole deal at risk.
For buyers, closing a deal in a short a time as possible can sometimes be the key. This is especially true for secondaries firms that pride themselves on having high visibility into the funds they focus on, with buyers who are already investors in a fund having an edge over those who aren’t.
“They tend to have an early warning if there’s a huge uptick in the NAV,” says Gabriel Boghossian, partner at law firm Stephenson Harwood. If buyers are covering a GP and its portfolio companies, and they know the fund’s NAV will go up, they will often push for an imminent close, he says.
On the flip side, it’s also in the seller’s interest to lock in a price because what can go up can go down. “You definitely get sellers who are so pleased with the price they’ve received, they’re concerned that when buyers see the next NAV, they’re not going to want it anymore,” Boghossian says.
For more on how fundraising cycles, distributions and macroeconomic wobbles can threaten deals, keep your eyes out for our secondaries special in September’s Private Equity International.