When deals go south

Stapled deals and restructurings can fall through for many reasons, but it’s often related to pricing that’s too low and LPs who don’t feel the need to sell.

Last week we reported on Spanish firm N+1’s failure to close a stapled deal, which would have boosted fundraising for the firm’s latest fund. The Madrid-based manager had begun a process in May where existing investors were given the option to sell their stakes to new investors, who would also invest in the firm’s latest fund. The deal fell through in August, according to sources, as not enough existing limited partners wanted to sell their stakes at the price offered.

Stapled deals and restructurings are resource-intensive, time-consuming, expensive and ultimately risky. If they succeed, they can cut short fundraising by months and/or allow more time for assets to be realised.

Take the Palamon Capital Partners deal that we reported in August – a group of five institutional investors bought stakes in two tail-end Palamon funds and simultaneously committed to a new fund managed by the firm. At least 15 existing partners ultimately decided to sell their stakes at a price above 95 percent of net asset value (NAV), and the process took about six months, according to the firm. Deals such as this are typical examples of what industry participants refer to as win-win-win, where existing LPs, the GP and the new investors all gain from the transaction.

On the other hand, if a deal fails, it can be costly for the GP who may be left with a lack of commitments to a new fund, as well as bills from the lawyers and intermediaries who tried to get the deal off the ground. It’s also a waste of time for the advisor, who may have spent months trying to align everyone’s interests.

“Most of these deals take many months to put together,” Sunaina Sinha, a partner at placement agent and secondaries advisory firm Cebile Capital told me.
Such deals require intense due diligence that takes up the GP’s and potential buyers’ time, and if the deal fails at a late stage, it’s a near disaster, she said.

“If you were counting on that process to get you to a first close or to get you to a certain amount of capital and it falls apart, the market knows that you have had a precarious start to your fundraising and this can make you look bad,” Sinha said.

Other sources I’ve spoken to point to what happened with London-headquartered Doughty Hanson’s attempt to raise capital for Doughty Hanson VI as this year’s biggest example of a failed stapled deal, although they say there were also other factors at play. The firm secured commitments from HarbourVest Partners, as part of HarbourVest agreeing to purchase secondary stakes in Doughty’s Fund IV and V but for various reasons the firm abandoned attempts in April to raise its €2 billion fund, saying it would focus on realising the remaining assets in its funds instead.

Of course, a deal may fail to close for several reasons, including the existing LPs not wanting to sell their stakes because they’re happy with how the GP is performing. A failed staple can be a vote of confidence for the portfolio, but it can also be that pricing was simply not attractive enough for LPs to exit.

N+1 has secured a €100 million commitment from the Spanish government’s financing agency Centre for the Development of Industrial Technology (CDTI), but that hinges upon N+1 raising at least €300 million from private investors, a spokeswoman for the CDTI told me. With the deal falling through, the firm will have to find €300 million without the lure of secondaries stakes in its existing funds. N+1 declined to comment.

Convincing existing LPs to sell is usually just a matter of price, one source told me.
“Most investors around the world today are not starving for liquidity,” the source said. “They’re actually quite well off, in fact they have too much liquidity. Investors today don’t need to tolerate a discount.”

So how can you ensure a deal goes through? Ironing out potential issues and aligning interests before beginning a GP-led deal is crucial to streamlining the process, according to one source at an advisory firm, while a lawyer who works on fund restructurings told me being up front with existing investors as early as possible is key.

“The first time that LPs hear about the deal shouldn’t be when they get a consent solicitation in the mail,” the lawyer said.

Ultimately, though, a GP needs to have a back-up plan if not enough LPs decide to sell, as with the N+1 deal.

“GPs need to be careful not to rely on this solely for their fundraising strategy — that’s the lesson here,” Sinha said. “If this process fails, there should be enough pre-marketing that has taken place, and there should be enough re-upping from existing LPs to make up for it if the deal falls apart.”

What’s your view? Write to adam.l@peimedia.com in London or marine.c@peimedia.com in New York.