Early negotiations around alignment and a comprehensive, transparent price discovery process are among the most important considerations for sponsors running GP-led transactions, a conference has heard.
“[GP-leds] change the game for LPs – I think we should recognise that. And very often it means these transactions are always good for GPs, very often good for LPs, but not always,” Ruulke Bagijn, head of global investment solutions at Carlyle Group told delegates at Invest Europe’s Investors’ Forum in Geneva on Thursday. Bagijn is also chair of the board of AlpInvest, Carlyle’s fund of funds and secondaries unit.
“As an LP, we try to negotiate very early on in the process with the GP. We ask mostly three things: enough time to evaluate, a competitive process – this is a real, big one – and economics and status quo options.”
GP-led secondaries deal volume hit $63 billion globally in 2021, more than double the $30 billion in 2020, according to Lazard’s Sponsor-led Secondary Market Report. The growth of GP-led deals has significantly outpaced LP-led secondaries over the past five years. Deal volumes were roughly equal for both parts of the market in 2021, compared with 2016 when GP-led deals represented less than one-third of the market.
Bagijn was joined on the panel by Merrick McKay, head of Europe private equity at abrdn, who added that it is also important to balance the manager’s own interests with those of their existing investors and the buyers. McKay reported seeing an increasing number of cases where “investors feel a degree of conflict washing”.
“What’s happened quite a lot in the GP-led market is they’re not coming from alignment,” he said. “They’re thinking: ‘Is there an opportunity that can be good for us?’”
A fair price discovery process is also crucial, Nik Morandi, a managing director at Blackstone’s Strategic Partners unit, said during the panel.
“There are so many eyeballs on these deals now – from LPs and GPs to advisers and large PE houses buying secondaries platforms – all of these reputations are tied up [and they need to] make sure the transaction is undertaken in a way that’s fair and transparent,” Morandi added.
Several recent single-asset secondaries deals have had their valuations set by earlier minority stake sales. This is considered a strong mechanism because it gives the asset value market validation, as opposed to hiring one or more external firms to provide fair value assessments.
Sponsors should treat minority recapitalisations as just one component of the price discovery process, McKay said, noting: “It’s a minority price but it’s not an overall price.”
“You can never get proper price discovery in these processes,” he added. “Would this asset be worth a bit more if it were marketed properly? Yes it will, and LPs think: ‘We are getting out at a good price’.”
Single-asset processes have been the most dominant form of GP-led deal in the past 12 months, representing more than half of sponsor-led deals, according to Lazard. That compares with just 38 percent in 2020. In late 2021, Clayton, Dubilier & Rice closed what appears to be the largest-ever single-asset secondary deal for portfolio company Belron, which was sold at about $4 billion to an investor group that included Hellman & Friedman, GIC, and BlackRock Private Equity Partners.
This article first appeared on affiliate title Private Equity International.