GP-led secondaries deals hit a record $22 billion last year, the highest volume ever recorded, according to data from Lazard Freres & Co. Sponsor-led deals continued apace in 2019, with Collier and Investcorp coming together on a $1 billion transaction in January, followed by Nordic Capital executing the largest-ever GP-led deal in March. If sponsor-led deals were once indicative of trouble, the stigma surrounding this part of the secondaries market has all but disappeared. But now it seems investors want to pump the brakes and get more information.
GP-led secondaries typically occur near the end of a fund lifecycle when firms want to extend an investment period to realize greater returns or give investors the option to exit. In the past, these transactions have been indicative of bad bets, or so-called “zombie funds” with struggling companies that can’t be exited for one reason or another. Today, GP-led deals are becoming more common as sponsors move to have greater control over when they exit portfolio companies. LPs can benefit from increased liquidity as well as the ability to exit manager relationships that may no longer be core to the portfolio.
Eric Albertson, senior investment director, private equity and private markets at Aberdeen Standard Investments, says the secondaries market has evolved significantly over the past decade. It started with LPs becoming more aggressive about portfolio management, using the secondaries market as a means of pruning manager relationships or buying into otherwise closed funds. More recently, Albertson says, “GPs have woken up to the fact that there is a solution for them and so you’re seeing a big wave of GPs being more active with their portfolios.”
Albertson notes that the secondaries market generally is really a source of innovation in terms of all parties being able to more effectively manage liquidity in what is otherwise an illiquid asset class. “This is how you create a win-win,” he says.
However, new guidelines from the (ILPA) Institutional Limited Partners Association suggest that investors may want to slow things down a bit. Earlier this month, the ILPA released new guidance for investors on GP-led secondaries with the goal of standardizing the process whereby investors are made aware of fund sponsors’ desires to change things up. ILPA is calling on private equity to ensure that sponsor-led restructurings are fully transparent and that investor advisory committees have enough time to consider the transactions before they are expected to act. The association also wants investors to be able to keep their original fund terms in place and be made aware of any changes in fees if they choose to roll over their investments.“Transparency helps everyone get comfortable with the transaction,” says Steve Hartt, a principal in the Private Markets Group at Meketa Investment Group. He notes that GP-led restructurings can be complex and conflicts can arise for investors if parties aren’t aware of all of the information before they act.
By seeking to standardize the process, ILPA may be making things easier for both investors and GPs. “GP-led transactions are always going to be a part of the marketplace and if you can reduce the friction costs of the transaction and standardize information, it will help make the market more efficient,” Hartt said.ILPA also plans to include the new guidelines as part of its Principles 3.0 document, set for release later this quarter.
Related Stories:ILPA Pushing Fee Template Implementation