General partners thinking of carrying out a GP-led secondaries process on a fund should offer investors a status quo option, according to the head of investor relations management at BC Partners.
Speaking on the secondaries panel at the British Private Equity & Venture Capital Association‘s annual summit in London on 12 October, Laura Coquis said that the buyout firm was “incredibly apprehensive” about pursuing a tender offer and stapled deal on its ninth flagship fund unless it was convinced that all LPs would be pleased with the outcome.
“One of the criteria we absolutely had was, for those who just want to ignore it, they have the option to ignore it and everything continues as they expected when they made their original commitment with us,” she said. All GPs should consider how they can use secondaries, but should use the same criteria with which BC executed its August deal with secondaries firm Lexington Partners, she added.
Over the summer, investors in the London-headquartered firm’s €6.7 billion 2011-vintage BC European Capital IX fund were given the opportunity to sell their stakes or continue to the end of the fund’s life. Lexington agreed to acquire around $700 million-worth of stakes from 22 exiting LPs and commit $300 million to BC’s 10th fund, which was set to close on $6.5 billion-$6.7 billion, according to PEI reports.
The deal was one of a flurry of instances of high quality primary managers using the secondaries market to restructure funds or aid fundraising.
In September, sister publication Secondaries Investor reported that EQT had given LPs the option to sell their stakes in EQT VI, its 2011-vintage flagship fund, to Partners Group, which would then make a commitment to EQT Mid Market Asia III. Nordic Capital and Apax have also embarked on processes, though the latter was pulled last week.
Coquis added that for her firm, it was vital that the process not make primary investors feel as if they were getting the short straw or that their relationship with the GP was being “tainted” in any way.
“[Some of the proposed deal structures] would have been good for us and good for the secondary investor, but we could not get comfortable that they would be good for those that would not want to participate, so we dismissed them entirely,” she said.
A stapled deal typically involves LPs in a fund being given the option to sell their stakes to a secondaries buyer. The buyer will purchase the stakes of the willing LPs and make a commitment to the fund’s successor.
According to a 2016 survey by intermediary Setter Capital, 54.7 percent of respondents felt that more GPs attempted to liquidate or restructure older funds last year compared with a year earlier, and 25.3 percent of respondents felt that a materially higher number had sought staples.
Coquis also remarked on what she perceived as an “average price stigma”. Lexington bought LPs’ stakes at a 14 percent premium to March net asset value, a level that some buyers are reluctant to pay given that most stakes change hands for around a 5 percent discount.
“We had a performing fund and clearly there was expectation of a premium,” she said. Buyers should pay a premium for a performing fund that contains value growth, she added.