GP-led transactions stole the spotlight in the secondaries market in 2017 and the bulk of the activity took place in Europe.
Deal volume for GP-leds in 2017 was $14 billion, almost 25 percent of the market, according to data from Greenhill. The advisory firm noted in its annual report that European GPs drove volume, accounting for 48 percent of GP-led market share compared with 40 percent in North America.
Evolution in secondaries transactions has typically come from North America, where the vast majority of deals, 66 percent last year, are taking place. European activity accounted for only 22 percent of secondaries in 2017.
The relative lack of GP-led activity in North America is not for lack of potential dealflow, noted Greenhill: there is a significant pipeline of suitable funds that could come to market in the next 12 to 24 months, the advisor said.
Three reasons could explain the current Euro-centric market:
- The continent’s public markets have lagged their US counterparts
US stock markets rose significantly in 2017, with the S&P500, NASDAQ and Dow Jones Industrial Average returning 19 percent, 27 percent and 24 percent respectively.
In Europe, growth was less than half of that in the US, with the FTSE 100, France’s CAC 40 and the DAX increasing by 8 percent, 12.5 percent and 12.5 percent respectively.
Vibrant public markets in the US not only offered an exit route to GPs but also boosted portfolio companies’ valuations, making it less pressing to offer liquidity to limited partners.
- European GPs have a greater need to crystallise carry
The European waterfall model favours back-ended carried interest, after investors have had all capital commitments back together with their preferred return. The American model allows GPs to receive carry on a deal-by-deal basis.
With US GPs pocketing some of the carried interest earlier in the life of the fund, they may be less incentivised to proceed to a GP-led transaction to accelerate exits.
“If you’re a US manager, obviously there’s still a lot of benefits to you but the deal-by-deal waterfall makes it a little different because your risk is isolated on a company-by-company basis,” a lawyer said.
“In Europe, if I have four or five companies left, to get back over the hurdle I’m going to have to sell two or three of them before I get into carry. But if you do a fund restructuring, you can sell all four companies at the same time. That means I get to lock that value in now, for purpose of the waterfall, and I can say on a bundled basis I am offering a sale to my LPs. That fact is partially what’s driving […] more of these deals by healthy GPs in Europe.”
- US regulators are watching GP-led restructurings closely
In the past couple of years, the Securities and Exchange Commission has been vocal about scrutinising GP-led restructurings and deals involving a staple component.
There’s a worry GPs seeking staples as part of a secondaries sale aren’t fulfilling their fiduciary duty but putting the interests of the firm and raising the next fund before that of existing LPs, we wrote in 2015.
Several market participants tell Secondaries Investor the SEC has looked at nearly all American GP-leds since then to make sure the deals are fair to LPs.
A secondaries advisor tells us that scrutiny may be deterring some GPs. He added it may also be why tender offers and asset strip sales have predominated. These deals tend to be smaller in size and may not be enough to boost volume on their own.
Do you anticipate US GP-led transactions will pick up in the in 2018? What would trigger an increase in volume? Tell us at: firstname.lastname@example.org